Steps for present value with risk aversion:

(a) Figure the dollar amount of each payment

(b) Apply the discount factor

(c) Calculate utilities

(d) Apply probabilities

(e) Sum

You have $10,000 to invest for one year, with the following probabilities of return:

70% chance of receiving your $10,000 back (no gain in value)

30% chance of receiving $15,000 (a $5,000 gain in value)

There is a $400 nonrefundable fee you would have to pay for drawing up the contract.

With 10 percent as the relevant interest rate, would you make the investment based on a present value calculation alone? Would you make the investment if you use present value with risk aversion?