Pfizer and Sirius

Part 1

Question A

Present Value at 5 Discount Rate

Year 1 110 ,000 x 0 .95238 104 ,761 .80

Year 2 350 ,000 x 0 .90703 317 ,460 .50

Question B

Net Present Value of Gold Mine at 7 Discount Rate

Year 1 110 ,000 x 0 .93458 102 ,803 .80

Year 2 350 ,000 x 0 .87344 305 ,704 .00

Net Present Value 408 ,507 .80

Question C

If interest rates and inflation are expected to increase in the foreseeable future , the discount rate of the

Gold Run will increase because interest rate and inflation are two variables that lead to an increase in the cost of capital (Window on State Government . For instance , if the inflation rises by a further 2 than expected , the cash inflow from the money invested in the goldmine will further diminish in the next two years due to a lower purchasing power . Likewise , if interest rates increase in such time frame the opportunity cost of the money invested in the gold mine will rise . Opportunity cost is an economic term referred for the lost alternative in business evaluations Therefore if interest rate rises from 4 to 6 the opportunity cost of the capital investment in the gold mine will be higher for Pfizer and Sirius due to a greater loss in the interest receivable if such money was deposited in a bank account . As a result the net present value of the investment returns will further decrease in today 's terms . This will in turn direct towards a lower net present value and a smaller price for the goldmine

Question D

Another important component which affects the discount rate applied for capital projects is the property specific risk premium . An evaluation of a project normally endows estimates of future cash inflows attained from such capital project . Such projections are uncertain and susceptible to unexpected changes . In this respect property-specific risk premiums are added to the other discount rate components forming a higher level of discount range

If the goldmine is located in a turbulent area where a weak economy is present , the property-specific risk premium would be high due to a strong probability of unexpected adverse economic conditions which may drastically affect the project viability . For instance , in third world countries government collapses are common , which lead to seizure and impairment of business assets from the government that takes over control . Therefore the property-specific risk premium would be much higher than a more stable economy like the United States of America . As a result the discount rate would be higher leading to lower net present value . This would direct towards a lower price for the goldmine investment

Part 2

Apart from the inflation rate and opportunity cost of investment , a bond is also vulnerable to the risks that the organization face . Inflation and opportunity cost of investment are uniform for both firms in such case . Therefore the decision on which

company should the investor pay the higher price rests on the specific...