Problem 1: How accurate do you think a company's estimates of the net present value of a proposed project are under the following scenarios? Are there any important differences in the accuracy to be expected in the various scenarios?
a) Buying new equipment for a factory line at Ford.
b) Putting a value on a patent for a new drug at Pfizer.
c) Buying a new 747 for a NYC-Tokyo route at Japan Air Lines.
d) Building a store to sell a new product by a startup company
Problem 2: Discount rates will vary based upon your own personal level of risk tolerance. For example, I might be willing to buy a risky stock if I think I'll earn 10% while my wife would need at least 20% before she'd consider it. What's your discount rate for the following types of equities? How did you determine that rate?
a) A risk free equity (a US Treasury Note - called risk free because if they can't pay, your money is worthless!)
b) A CD at a South American bank paying in their local currency.
c) A stock in a company that has a secure stream of income from a long term contract customer.
d) A stock in a company that has an interesting business plan but no real operations as of yet (as NY Lotto says "A Dollar and A Dream")