Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $2,700 for each of the next 4 years and $12,408 in 5 years. Her research indicates that she must earn 4% on low-risk assets, 6% on average-risk assets, and 15% 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.
Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $2,700 for each of the next 4 years and $12,408 in 5 years. Her research indicates that she must earn 4% on low-risk assets, 6% on average-risk assets, and 15% 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.
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 3MAD
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Question
Laura Drake wishes to estimate the value of an asset expected to provide
$2,700
for each of the next 4 years and
$12,408
in 5 years. Her research indicates that she must earn
4%
on low-risk assets,
6%
on average-risk assets, and
15%
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?
- All else being thesame, what effect does increasing risk have on the value of anasset? Explain in light of your findings in part
a.
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