Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $4,000 for each of the next 4 years and $21,749 in 5 years. Her research indicates that she must earn 5% on low-risk assets, 7% on average risk assets, and 13% on high-risk assets.

a. Determine what is the most Luara 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 finding 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 finding in part a.