Certainty Equivalent

I would need to see the actual question to be able to know what they required. If it is in the current edition of the Revision Kit then tell me the number of the question.

Muggins is evaluating a project to produce a new product. The product has an expected life of four years. Costs associated with the product are expected to be as follows. Variable costs per unit Labour: $30 Materials: 6 kg of material X at $1.64 per kg 3 units of component Y at $4.20 per unit Other variable costs: $4.40 Indirect cost each year Apportionment of head office salaries $118,000 Apportionment of general building occupancy $168,000 Other overheads $80,000, of which $60,000 represent additional cash expenditures (including rent of machinery) To manufacture the product, a product manager will have to be recruited at an annual gross cost of $34,000, and one assistant manager, whose current annual salary is $30,000, will be transferred from another department, where they will be replaced by a new appointee at a cost of $27,000 a year. The necessary machinery will be rented. It will be installed in the company's factory. This will take up space that would otherwise be rented to another local company for $135,000 a year. This rent (for the factory space) is not subject to any uncertainty, as a binding four-year lease would be created. 60,000 kg of material X are already in inventory, at a purchase value of $98,400. They have no use other than the manufacture of the new product. Their disposal value is $50,000. Expected sales volumes of the product, at the proposed selling price of $125 a unit, are as follows. Year 1 2 3 4 Expected sales Units 10,000 18,000 18,000 19,000 All sales and costs will be on a cash basis and should be assumed to occur at the end of the year. Ignore taxation. The company requires that certainty-equivalent cash flows have a positive NPV at a discount rate of 5%. Adjustment factors to arrive at certainty-equivalent amounts are as follows. Year 1 2 3 4 Costs Benefits 1.1 0.9 1.3 0.8 1.4 0.7 1.5 0.6 Required Assess on financial grounds whether the project is acceptable.

Certainty equivalent is not a term that is used in the exam and this is not a past exam question. I can only assume that the question is expecting you to multiply by the relevant factor. I would assume that the workings in the answer make it clear what is being done, but it is certainly nothing that I would worry about!