7 Asset Valuation—General. Your client is considering purchasing an asset which is expected to return a cash flow of £1,250 at the end of each year for the next five years. At the end of year five it is estimated that the asset would have a net realisable value (after selling expenses) of £500.

To purchase this asset your client would have to cash in some other investments, estimated to be of a similar risk category, on which he is currently earning an annual rate of return of 7 per cent. You are required to:

(a) Identify the relevant cash flows and their timings.

(b) Advise your client of the maximum price he should pay to purchase the asset.

Calculations should be to the nearest £. State clearly any assumptions you make.