1. FastDrop economic value You are planning to place your money in safe government securities, which currently offer a 4% riskless rate of return. Before making this investment, an entrepreneur approaches you and asks you to purchase her new business venture, Fast Drop, a delivery service for legal documents that would produce a single cash inflow of $80,000 at the end of the year. You have determined that 6% is an appropriate risk premium for this investment. How much would you be willing to pay for Fast Drop?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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1. FastDrop economic value
You are planning to place your money in safe government securities, which currently
offer a 4% riskless rate of return. Before making this investment, an entrepreneur
approaches you and asks you to purchase her new business venture, Fast Drop, a
delivery service for legal documents that would produce a single cash inflow of
$80,000 at the end of the year. You have determined that 6% is an appropriate risk
premium for this investment. How much would you be willing to pay for Fast Drop?
Transcribed Image Text:1. FastDrop economic value You are planning to place your money in safe government securities, which currently offer a 4% riskless rate of return. Before making this investment, an entrepreneur approaches you and asks you to purchase her new business venture, Fast Drop, a delivery service for legal documents that would produce a single cash inflow of $80,000 at the end of the year. You have determined that 6% is an appropriate risk premium for this investment. How much would you be willing to pay for Fast Drop?
Expert Solution
Step 1: Formula.

1.Appropriate discount rate = Risk free rate + Risk premium


2. Present value is calculated by following formula:-

PV = fraction numerator F V over denominator left parenthesis 1 plus r right parenthesis to the power of n end fraction

where

PV = present value

FV = future value

r =Appropriate discount rate

n = time period.

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