Info

Expected value of cash flows Cost

$1,300,000 720,000 280,000

$2,300,000 2,000,000

Expected net present value $ 300,000

These risk and expected return differentials can be incorporated into the decision-making process in a variety of ways. Assigning utility values to the cash flows given in column 4 of Figure 14.5 would state column 5 in terms of expected utility. The company could then choose the plant size that provided the greatest expected utility. Alternatively, present values given in column 4 could be adjusted using the certainty equivalent or risk-adjusted discount rate method. The plant that offers the largest risk-adjusted net present value is the optimal choice.

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