What is the certainty equivalent NPV?
The certainty equivalent is a guaranteed return that someone would accept now, rather than taking a chance on a higher, but uncertain, return in the future. Put another way, the certainty equivalent is the guaranteed amount of cash that a person would consider as having the same amount of desirability as a risky asset.
How do you calculate certainty equivalent cashflow?
Though the expected cash flows in second option is $22.2 million (0.6×$25 million + 0.4×$18 million), the investor may actually prefer the first option of guaranteed cash flow of $20 million because that first option is risk free….Formula.
| Certainty Equivalent Cash Flow | |
|---|---|
| = | Expected Cash Flow |
| 1 + Risk Premium |
What is equivalent approach?
The equivalent annual annuity approach is one of two methods used in capital budgeting to compare mutually exclusive projects with unequal lives. The EAA approach calculates the constant annual cash flow generated by a project over its lifespan if it was an annuity.
What is the certainty equivalent of a gamble?
The certainty equivalent of a gamble is an amount of money that provides equal utility to the random payoff of the gamble. The certainty equivalent is less than the expected outcome if the person is risk averse. The risk premium is defined to be the difference between the expected payoff and the certainty equivalent.
How do I make a single variable sensitive table in Excel?
To create a one variable data table, execute the following steps.
- Select cell B12 and type =D10 (refer to the total profit cell).
- Type the different percentages in column A.
- Select the range A12:B17.
- On the Data tab, in the Forecast group, click What-If Analysis.
- Click Data Table.
Which of the following is the correct formula for computing the present value of an annuity?
The formula for determining the present value of an annuity is PV = dollar amount of an individual annuity payment multiplied by P = PMT * [1 – [ (1 / 1+r)^n] / r] where: P = Present value of your annuity stream. PMT = Dollar amount of each payment. r = Discount or interest rate.
How do you compare two NPV projects?
When comparing two or more projects, the one with the highest NPV is typically the best choice. So the simplest way to apply the net present value method to capital rationing is to determine the NPV of each project and then list them in order from highest NPV to smallest.