Asked by Haydee Morales on May 17, 2024
Verified
Which of the following is an advantage of the certainty equivalent approach?
A) It allows decision makers to recognize particularly risky years.
B) It uses the cost of capital as the appropriate discount rate which is easier to calculate.
C) It uses regression analysis which gives a certain estimate of cash flows.
D) It uses computer simulation methods which makes a precise prediction of cash flows.
Certainty Equivalent Approach
A method used in capital budgeting and investment theory that adjusts future cash flows to account for risk, making them equivalent in value to certain cash flows.
Risky Years
A term not widely recognized in finance; possibly refers to periods of high financial uncertainty or volatility.
- Understand the framework of the certainty equivalent approach and its usefulness in reshaping cash flows to reflect risk.
Verified Answer
FA
Frances AdamsMay 18, 2024
Final Answer :
A
Explanation :
The certainty equivalent approach allows decision makers to adjust cash flows for risk, making it easier to recognize particularly risky years by converting uncertain cash flows into certain equivalents.
Learning Objectives
- Understand the framework of the certainty equivalent approach and its usefulness in reshaping cash flows to reflect risk.
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