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college rather than renting an appartment. If you buy the condo, during each of the next 4 years
you will have to pay property taxes and maintenance expenditures of about $7000 per year, but you
will avoid paying rent of $10000 per year. When you graduate 4 years from now, you expect to sell
the condo for $126000 after taxes. If you buy the condo, you will use money you have saved that is
currently invested and earning a 6% annual after-tax rate of return. Assume for simplicity that all
cash flows (rent, maintenance, etc.) would occur at the end of each year.
a. Draw a timeline showing the cash flows, their timing, and the required return applicable to
valuing the condo.
Los flujos de efectivo equivalen a paréntesis izquierdo negativo $ 7 000 paréntesis derecho más $
10000 es igual a $ 3000
Los flujos de efectivo son $ 3 000 al final de cada año y $ 126000 al final del período de propiedad
planificado de 4 años. El rendimiento requerido es del 6%.
El valor de un activo hoy, PV, es la suma de los valores actuales de los flujos de efectivo anuales
(los impuestos a la propiedad y los gastos de mantenimiento netos contra los ahorros anuales de
alquiler), CF, que es una anualidad ordinaria, y los ingresos después de impuestos, FV Subscript n,
que es un flujo de caja único que se produce al final del período de propiedad:
Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $ 2300
per year at the end of years 1 through 4 and $10091 at the end of year 5. Her research indicates
that she must earn 7% on low-risk assets, 16% on average-risk assets, and 19% on high-risk assets.
a. 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.
a.
The NPV of the low-risk asset can be calculated using an Excel spreadsheet.
(1) If the asset is classified as low-risk and Laura must earn 7%
on low-risk assets, the most Laura should pay for the asset is computed as follows:
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 findings in part a, what is the most she should pay? Why?
If Laura Drake is unable to assess the risk (low, average, or high) associated with the asset, she still
wants to know the most she should be willing to pay for that asset. Conservative thinking would err
on the side of the lowest investment, which would presume that the investment is a high-risk asset.
Increased risk would increase the required rate of return, which would reduce the present value of
an asset. The most she should be willing to pay is
$10 297.37
c. All else being the same, what effect does increasing risk have on the value of an asset?
Explain in light of your findings in part a.
By increasing the risk of receiving cash flow from an asset, the required rate of return increases,
which reduces the value of the asset.