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?

We know that the estimates of NPV depend on the initial investment (cost of the project), the future cash inflow (or saving in cost) and required return rate. Since the return rate is already estimated before the investment, it does not vary in the following cases.

a) Buying new equipment for a factory line at Ford.
The initial investment is clearly the price of the factory line (assuming the price is paid at present). The future cash flow comes from the saving in labour costs and expenses. Since the labour expenses can be easily calculated by summing their salaries and fringe benefits, the estimate of the NPV is highly accurate.

b) Putting a value on a patent for a new drug at Pfizer.
The development expense is only a portion of the patent value. Its value actually comes from the expected sales of drugs based on the patent, or the cash inflows. Since the sales of drugs depends on the market demand, which is hard to estimate, the accuracy of estimate of NPV is low.

c) Buying a new 747 for a NYC-Tokyo route at Japan Air Lines.
The initial investment is clearly the price of the plane. The future cash flow can be calculated by the counting the present passengers between NYC and Tokyo. Thus, we can get a reasonable estimate of cash inflows, and the estimate of the NPV is relatively accurate.

d) Building a store to sell a new product by a startup company
The initial investment is the total construction cost plus administrative expenses, both of which are in large sum and hard to estimate. The future cash flow comes from sales in the store, which depends on the estimate of a highly flexible demand curve. Additionally, the NEW firm is selling a NEW product in a NEW store, and there seems no historical information available for estimating the revenue. Therefore, the estimate of the NPV is not likely to be accurate.

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!)
Albeit the definition, a US treasury note is usually thought to be free of default risk. That is, it is quite safe to invest in this equity. Therefore, I would choose a low discount rate (say 5-10%), because my money would not be worthless even in the far future.

b) A CD at a South American bank paying in their local currency.
Due to the country risk in exchange rate, a CD at a South American bank will drop in value if their currency depreciates in the future. Therefore, I would choose a fairly high discount rate (say 20%), because the future value of my equity would be much lower.

c) A stock in a company that has a secure stream of income from a long term contract customer.
If I can expect a long term steady income to the company, I would expect a safe investment in the company's stock, and also steady dividend returns from the company. Therefore, I would choose a low discount rate (say 10%), because the stock price is not expected to drop in the near future.

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")
If I cannot clearly see a real operation, it is not safe to invest in the stock. Therefore, I would choose a high discount rate (say 25%), because the stock price might vary greatly over time and my future return is not guaranteed.