Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $2,800 per year at the end of years 1 through 4 and $15,565 at the end of year 5. Her research indicates that she must earn 11?% on? low-risk assets, 16?% on? average-risk assets, and 22?% on? high-risk assets.
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 in light of your findings in part a.