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What is the project's certainty-equivalent NPV?


The Bull Company, a lawn mower manufacturer, is considering the introduction of a new model. The initial outlay required is $22 million. Net cash flows over the 4-year life cycle and the corresponding certainty-equivalents of the new model are as follows:

YearNet Cash FlowCertainty-equivalent
1$15 million 0.90
213 million0.75
311 million0.55
4 9 million0.30

The firm's cost of capital is 14% and the risk-free rate is 6%. Bull uses the certainty-equivalent approach in evaluating above-average risk investments such as this one. What is the project's certainty-equivalent NPV?
a.$20,083,000
b.$ 6,628,400
c.$13,905,000
d.$ 3,019,400

b. It is 6,628,400

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