P$6-17$ Asset valuation and risk Laura Drake wishes to estimate the value of an asset expected to

provide cash inflows of $$3,000$ per year for each of the next four years and $$15,000$ in five years. Her

research indicates that she must earn $4\%$ on low$-$risk assets, $7\%$ on average$-$risk assets, and $14\%$ on

high$-$risk assets.

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.

Suppose that 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 the same, what effect does increasing risk have on the value of an asset? Explain your

answer in light of your findings in part a$.$