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 WHERE APPLICAPLE
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.
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