Suppose investor A has $20,000 in his account and derives 4 utiles of utility from this amount and would derive 5 utiles of utility is he had $40,000. He is face with a choice to invest $20,000 in a project that has 60% probability of earning a profit of $20,000 and 40% of losing $20,000? Is the manager likely to invest in the project?
A project has expected risky cash flows of $40,000 in perpetuity. Given that the risk adjusted rate of return for the project is 15%, and the risk free rate is 5%, What are the certainty equivalent cash flows in perpetuity?