Certainty Equivalent NPV. Rush Corporation is considering the purchase of a new machine that will last 5 years and require a cash outlay of $300,000. The firm has a 12 percent cost of capital rate and its after-tax risk-free rate is 9 percent. The company has expected cash inflows and certainty equivalents for these cash inflows, as follows:
|
Year
|
After-Tax
Cash Inflows ($)
|
Certainty
Equivalent
|
|
1
|
100,000
|
1.00
|
|
2
|
100,000
|
0.95
|
|
3
|
100,000
|
0.90
|
|
4
|
100,000
|
0.80
|
|
5
|
100,000
|
0.70
|
Calculate (a) the unadjusted NPV, and (b) the certainty equivalent NPV. (c) Determine if the machine should be purchased.