Steps for present value with risk aversion:
(a) Figure the dollar amount of each payment
(b) Apply the discount factor
(c) Calculate utilities
(d) Apply probabilities
(e) Sum
You have $50,000 to invest for 2 years. At the end of two years, you will receive 20 percent of second-year profits.
Use 7 percent as the relevant interest rate. (No contract fee).
Second year profits:
25% chance of $150,000
50% chance of $250,000
25% chance of $500,000
Would you make the investment if you use present value with risk aversion?