Python Exercises for Corporate Finance and Risk Management

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Question: 101

Following question no 99, if you use a constant risk-adjusted discount rate, what is the correct value of the certainty equivalent cash flow in year 1?


We are going to use previous two questions (99, 100) to use values Cashflow_1(cf_1), and interest rate(r) in this question.

Since we have got values of cf_1, and r in previous two question, we are going to use these values find new cash flow of the year 1.

Please use the following steps:

  • Define a function with the name "certainty_equivalent_cash_flow_in_year_1" which will take three arguments, cf_1, interest rate(r), and risk free rate(rf).
  • The signature of the function should be like:

def certainty_equivalent_cash_flow_in_year_1(cf_1, r, rf):

  • Using the following formula to find the value of certainty equivalent cash flow in year 1?-

CECF_1= ((cf_1/(1+r))*(1+rf))


CECF = certainty equivalent cash flow in year 1 cf_1 = cash flow r = interest rate rf = risk free interest rate

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