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hello Sir
certainty-equivalent approach. By this method, the expected cash flows of the project
are converted to riskless equivalent amounts. The greater the risk of an expected cash flow, the smaller
the certainty-equivalent value (for receipts) or the larger the certainty equivalent value (for payments).
plz explainjSuppose you were thinking of starting a business which could make you a lot of money, but was risky in that it might not do well – the return being uncertain.
On the other hand you could stay working where you are and receive a salary -less than what the business might make, but certain.If you thought the two were equivalent then the salary would be a certainty equivalent. (You could not be asked any calculations on this)
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