Your firm is developing the analysis for a new bio-diesel plant in Carthage. This plant will use new technology to convert waste material from local poultry integrators and fast food restaurants into commercial grade diesel fuel. The technology is new and somewhat uncertain. You have the developed the following cash flows estimates. The project will only last 3 years after which new technology will make the method obsolete. The firm’s cost of capital for average risk projects is 11%, the risk free rate is 6%, the beta of the project is 2.5 and the market return is 10%. The certainty equivalent factors are provided in the third column. Should the project be accepted according to the risk adjusted NPV technique? What decision do you recommend if the certainty equivalent method is used.
Yr 0 ($850,000) 100%
Yr 1 $320,000 90%
Yr 2 $420,000 80%
Yr 3 $440,000 80%