How much are you willing to pay for an investment where you expect to receive $500 a year for 7 years and an additional $10,000 at the end of the fifth year. Assume this investment is no riskier than putting money in a bank earning 2%. (that is your opportunity cost is 2%). Now assume that the investment is somewhat riskier (likelihood of receiving future cash flow is less certain) than putting money in a bank. How much are you willing to invesT. What is your revised expected rate of return.
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