The certainty equivalent approach is a risk evaluation technique. Which of the following statements is/are correct?
I. Certainty equivalents adjust the cash flows in the numerator of the NPV equation.
II. Using the RADR involves adjustments to the denominator of the NPV equation.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question

Quizplus · Accepted Answer

Certainty equivalents adjust the cash flows in the numerator of the NPV equation to reflect risk, while the Risk-Adjusted Discount Rate (RADR) method involves adjusting the discount rate in the denominator to account for risk.

The Certainty Equivalent Approach Is a Risk Evaluation Technique