Answer Happy

You are considering an investment in the equity of a business venture. You estimate the risk is similar to the risk of investing in the stock market, and you believe the stock market will provide a nominal expected rate of return of 6% p.a. The cash investment you are considering to making is $10,000. In exchange, you will receive a promised dividend of $300 per year for eight years, starting in one year, and a promised lump sum at the end of eight years of $12,000. a) Assuming you will receive the amounts promised, calculate the PV of the future amounts. Should you invest? b) In fact, because the venture is risky, you might not receive all of the promised payments. How would this affect your estimate of their PV? How might you allow for this uncertainty in your calculations? Explain your answer