Lothar Drake wishes to estimate the value of an asset expected to provide cash inflows of $4,000 at the end of years 1 and 2, $5,000 at the end of years 3 and 4, and $4,500 at the end of year 5. His research indicates that he must earn 4% on low-risk assets, 6% on average-risk assets, and 10% on high-risk assets.

a. Determine what is the most Lothar should pay for the asset if it is classified as (1) low-risk, (2) average-risk, and (3) high-risk.

b. Suppose that Lothar is unable to assess the risk of the asset and wants to be certain that he is making a good decision. Based on your findings in part a, what is the most he should pay? Why? 

c. 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.