GK
ACCOUNTING
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
Cash
|
|
|
Inventory
|
|
|
Pay-back Period
|
|
|
Certainty Equivalent Approach
|
Detailed explanation-1: -Certainty equivalent: The certainty equivalent method recognises the risk in capital budgeting by adjusting estimated cash flows and employ risk free rate to discount t usted cash flows.
Detailed explanation-2: -In another way the risk can be adjusted. That is by identifying risk premium from the expected cash flows. The equivalent riskless cash flows can be converted which is discounted at the risk-free rate of interest.
Detailed explanation-3: -The certainty-equivalent approach recognizes risk in capital budgeting analysis by adjusting estimated cash flows and employs risk-free rate to discount the adjusted cash flows. On the other hand, the risk-adjusted discount rate adjusts for risk by adjusting the discount rate.