Tuchel Ltd is considering a new project that has a higher level of risk than...
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Finance
Tuchel Ltd is considering a new project that has a higher level of risk than its existing projects. The expected cash flows and certainty equivalent coefficients for the project are below:
Year
Expected Post-Tax Cash Flows
Certainty-Equivalent Coefficients
0
- $150,000
1.00
1
$48,000
0.98
2
$45,000
0.95
3
$43,000
0.85
4
$35,000
0.75
5
$30,000
0.65
The current risk-free rate is 4.5%.
Tuchel Ltd has a required rate of return of 11%.
The risk premium for this project is 2.5%.
The NPV of the project using the Certainty-Equivalent Method is:
-$668
Other
-$448
$12,459
$0
$3850
The NPV using the Risk-Adjusted Discount Rate Method is:
$0
$697
Other
-$6350
$14,231
-$666
Should Tuchel Ltd undertake the project under the Certainty-Equivalent Method?
No
Yes
Cannot say
Should Tuchel Ltd undertake the project under the Risk-Adjusted Discount Rate Method?
Yes
No
Cannot say
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