In [[Entrepreneurial Finance]]  the Certainty Equivalent Cash Flow or CEQ is defined as a common method of estimating [[Present Value]]. The second common method mentioned is the [[Risk Adjusted Discount Rate]]. In the CEQ method instead of adjusting the discount rate (which is done in the [[RADR]]) the risk adjustment is made directly to the cash flow. After that the risk-adjusted or, better in this case the ''certainty equivalent'' cash flow is converted to [[Present Value]] by discounting at the risk free rate. Thus, if:

$\Large C_{jt}$ is the expected future cash flow of asset $\Large j$ at time $\Large t$ the certainty equivalent cash flow $\Large CE(C_{jt})$ can be described as follows:

$\Large CE(C_{jt})$ $\Large =$ $\Large C_{jt} - RD_{jt}$

Where:
$\Large RD_{jt}$ is the dollar valued discount to $\Large C_{jt}$ that is required to convert the risky expected cash flow to its certainty equivalent.

Certainty Equivalent Cash Flow (CEQ) is:

$\Large PV$ - $\LARGE \sum{\frac{C_t-RD_r}{(1+r_{pt})^t}}$

Issues:
* What cash flows should be valued?
* How risky cash flows adjusted to their certainty equivalents?
* What is the discount rate for valuing certain future cash flows?
bag
finance_public
created
Fri, 06 Jan 2012 13:47:45 GMT
creator
dirkjan
modified
Fri, 06 Jan 2012 13:47:45 GMT
modifier
dirkjan
tags
M13
Term
creator
dirkjan