Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $1,800 for each of the next 4 years and $8,356 in 5 years. Her research indicates that she must earn 4% on low-risk assets, 8% on average-risk assets, and 13% on high-risk assets.

1. Determine what is the most Laura should pay for the asset if it is classified as (1) low-risk (2) average-risk (3) high-risk.
2. Suppose Laura is unable to assess the risk of the asset and wants to be certain shes making a good deal. On the basis of your findings in part a, what is the most she would pay? Why?
3. All else being the same, what effect does increasing risk have on the value of the asset? Explain in light of your findings in part a.