In theory, the risk-free rate is more appropriate for the NPV calculation in the certainty equivalent approach since:

A) it is assumed that there is no business-specific risk associated with the projects.
B) certainty equivalent factors cannot take negative values.
C) certainty equivalents imply zero risk.
D) certainty equivalents consider unsystematic risk only.

Certainty Equivalent Approach

A method to evaluate risk where uncertain future cash flows are converted into certain cash flows under the assumption of risk neutrality.

Risk-Free Rate

The interest rate excluding all risk premiums. The risk-free rate consists of the pure rate and an inflation adjustment. It is approximated by the three-month treasury bill rate. Written as kRF.