Fin501 Module Ii

FIN501 Module II

Part I

A. If the discount rate is 5% then the present value (the future worth of my money today) of my profits at the end of Year 1 is $104,762 and $317,460 at the end of Year 2.

B. With a discount rate of 7% I would be willing to sell my goldmine for $400,000 right now.

Reasoning:

The gold will run out in 2 years, my expected profit is $350,000. Once the gold is gone then the land may be worth something, therefore I added on another $50,000 for the land itself. I used the following equation for my calculations:

|where: |Pn = |Value at end of n time periods |

|  |P0 = |Beginning Value |

|  |I = |Interest |

|  |n = |Number of years |

Pn = P0(1 + I)n

Calculations at 5%

Year 1: P0 = $110,000/ (1.05)1 P0 = $104,000

Year 2: P0 = $350,000/ (1.05)2 P0 = $317,460

Calculations at 7%

Year 1: P0 = $110,000/ (1.07)1 P0 = $102,803

Year 2: P0 = $350,000/ (1.07)2 P0 = $305,703

C. If I believed that Interest rates and inflation were going to go up during the next two years, then my asking price would be higher. I would attempt to maximize my profits now based on the future potential of the goldmine. By choosing not to use this information to my advantage, I would rob myself of the opportunity to ensure my selling price today will be worth just as much or more in the future. For instance, if interest rates go up to 10% in two years then my selling price of $400,000 today will have a present value of $181,818 in two years.

D. I would expect buyers to pay a higher price for my goldmine.

The labor in an “unstable third world country” is cheap, the people work for mere pennies on the US Dollar; therefore, labor costs would be low and the buyer would more than likely have a system in place to deal with security and labor issues...