1) Drake wishes to evaluate value of the asset expected to give cash inflows of= $3000 per year at the end of years 1 through 4 and $15000 at the ending of year five. Her research points out that she should earn 10% on low risk assets, 15% on average risk assets, and 22% on high risk assets.
a) Find out what is the most Drake must pay for the asset if it is classified(1) low risk, (2) average risk, and (3) high risk.
b) Assume Drake is unable to assess risk of asset and wants got be certain she is making a good deal. On basis of your findings in part a, what is the most she must pay? Describe why?
c) All else being the same, what effect does rising risk have on value of the asset? Describe in light of your findings in part a.