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The certainty equivalent approach makes risky projects more acceptable by weighting the cash flow estimates.
Certainty Equivalent Approach
A method used in capital budgeting and investment theory that adjusts the future cash flows of investments for risk, making them equivalent to certain cash flows with no risk.
Risky Projects
Investments or ventures with a high degree of uncertainty, offering the potential for high returns or significant losses.
Cash Flow Estimates
A projection of how cash is expected to flow in and out of a business over a given period of time, helping in financial planning and analysis.
- Master and clarify the principles of the certainty equivalent approach and its employment within capital budgeting processes.
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Learning Objectives
- Master and clarify the principles of the certainty equivalent approach and its employment within capital budgeting processes.
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