Python Exercises for Corporate Finance and Risk Management

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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?


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.

Please use the following steps:

  • 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))


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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