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Question: 102

In the previous question (99), if you use a constant risk-adjusted discount rate, what is the value of the certainty equivalent cash flow in year 2?

INSTRUCTIONS

We are going to use previous two questions (99, 100) to use values Cashflow_2(cf_2), 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.

• Define a function with the name "certainty_equivalent_cash_flow_in_year_2" which will take three arguments cf_2, interest rate(r), and risk free rate(rf).
• The signature of the function should be like:

def certainty_equivalent_cash_flow_in_year_2(cf_2, r, rf):

• Using the following formula to find the value of certainty equivalent cash flow in year 2-

CECF= ((cf_2/(1+r))*(1+rf))

where,

CECF = certainty equivalent cash flow in year 1 cf_2 = cash flow given in question no 99 r = interest rate rf = risk free interest rate

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