Question

Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $3,000 for each of the next 4 years and ​$15,000 in 5 years. Her research indicates that she must earn 4​% on​ low-risk assets, 7​% on​ average-risk assets, and 14​% on​ high-risk assets.

Please answer A-C USING EXCEL FORMULAS. I NEED THIS IN EXCEL SHOWING EXCEL FORMULAS ONLY. I CAN'T UNDERSTAND THE ANSWER IF I CAN'T SEE THE FORMULAS FOR EACH FIELD.  

a. Determine what is the most Laura should pay for the asset if it is classified as​ (1) low-risk,​ (2) average-risk, and​(3) high-risk.

b. Suppose Laura is unable to assess the risk of the asset and wants to be certain​ she's making a good deal. On the basis of your findings in part a​, what is the most she should​pay? Why?

c. All else being the​ same, what effect does increasing risk have on the value of an​ asset? Explain your answer in light of your findings in part a.

Answer 1

a. Using excel formula

	A	B	C	D	E	F	G
1			Cash Flow Year 1	Cash Flow Year 2	Cash Flow Year 3	Cash Flow Year 4	Cash Flow Year 5
2			3000	3000	3000	3000	15000
3	Low Risk	4%	Laura Should Pay	$23,218.59	Excel Formula=NPV(B3;C2:G2)
4	Average Risk	7%	Laura Should Pay	$20,856.43	Excel Formula=NPV(B4;C2:G2)
5	High Risk	14%	Laura Should Pay	$16,531.67	Excel Formula=NPV(B5;C2:G2)

b. Based on part a she should pay max 16531.679 . This is because when risk is not known high risk of 14% should be taken

c. Higher the risk lower is the amount to be paid. With increase in risk the value to be paid decreases. This because higher is the risk higher is the discount rate and lower is the PV.