Using Excel and all Formulas.Asset valuation and risk Personal Finance Problem L

Question

Using Excel and all Formulas.Asset valuation and riskPersonal Finance ProblemLaura Drake wishes to estimate the value of an asset expected to provide cash inflows of

$ 3 comma 200$3,200

per year at the end of years 1 through 4 and

$16 comma 09716,097

at the end of year 5. Her research indicates that she must earn

99%

on low-risk assets,

1313%

onaverage-risk assets, and

1919%

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.

Explanation / Answer

a.

max price at 9% = 20,829.05

max price at 13% = 18,255.11

max price at 19% = 15,188.91

b. she should try to pay as less as possible to be sure, so she should pay 15,188.91

c. More the risk, lesser the value of the asset

9.00% Cash flows Year Discounted CF                             -   0 0.00                3,200.00 1 2935.78                3,200.00 2 2693.38                3,200.00 3 2470.99                3,200.00 4 2266.96              16,097.00 5 10461.95

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.