Discount Rate and Cost of Capital: Some More about the Puzzle

2011 ◽  
Author(s):  
Alfonso A. Rojo Rojo-Ramirez ◽  
Juana Alonso Canadas ◽  
Salvador Cruz-Rambaud Cruz-Rambaud
Keyword(s):  
Discount Rate ◽  
Cost Of Capital

scholarly journals The most appropriate discount rate

2013 ◽  
Vol 4 (03) ◽  
pp. 391-400 ◽  
Author(s):  
David F. Burgess ◽  
Richard O. Zerbe
Keyword(s):  
Private Sector ◽  
Discount Rate ◽  
Opportunity Cost ◽  
Time Preference ◽  
Cost Of Capital ◽  
Rate Of Return ◽  
Social Time ◽  
The Social ◽  
Benefits And Costs

The social opportunity cost of capital discount rate is the appropriate discount rate to use when evaluating government projects. It satisfies the fundamental rule that no project should be accepted that has a rate of return less than alternative available projects, and it ensures that worthy projects satisfy the potential Pareto test. The social time preference approach advocated by Moore et al. fails to satisfy either of these criteria even in the unlikely case that the private sector behaves myopically with respect to a project’s future benefits and costs.

scholarly journals Appropriate Discounting for Benefit-Cost Analysis

2011 ◽  
Vol 2 (2) ◽  
pp. 1-20 ◽  
Author(s):  
David F. Burgess ◽  
Richard O. Zerbe
Keyword(s):  
Cost Analysis ◽  
Discount Rate ◽  
Cost Of Capital ◽  
Hyperbolic Discounting ◽  
Ease Of Use ◽  
Benefit Cost Analysis ◽  
The Social ◽  
Net Benefits ◽  
Benefit Cost

In order to be sensible about what discount rate to use one must be clear about its purpose. We suggest that its purpose is to help select those projects that will contribute more net benefits than some other discount rate. This approach, which is after all the foundation for benefit-cost analysis, helps to reconcile different suggested procedures for determining the discount rate. We suggest that the social opportunity cost of capital (SOC) is superior to other suggested approaches in its generality and its ease of use. We use the SOC to determine a range of real rates that vary between 6% and 8%. We suggest that approaches based on determination of preferences, which result in hyperbolic discounting, are less appropriate and less useful.

The Weitzman Argument

2012 ◽  
Author(s):  
Christian Gollier
Keyword(s):  
Discount Rate ◽  
Opportunity Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Cash Flows ◽  
Simple Rule ◽  
Rate Of Return ◽  
Net Benefit ◽  
Investment Projects ◽  
Net Benefits

This chapter examines a model in which the exogeneous rate of return of capital is constant but random. Safe investment projects must be evaluated and implemented before this uncertainty can be fully revealed, i.e., before knowing the opportunity cost of capital. A simple rule of thumb in this context would be to compute the net present value (NPV) for each possible discount rate, and to implement the project if the expected NPV is positive. If the evaluator uses this approach, this is as if one would discount cash flows at a rate that is decreasing with maturity. This approach is implicitly based on the assumptions that the stakeholders are risk-neutral and transfer the net benefits of the project to an increase in immediate consumption. Opposite results prevail if one assumes that the net benefit is consumed at the maturity of the project.

On a social discount rate for forestry

1985 ◽  
Vol 15 (5) ◽  
pp. 927-934 ◽  
Author(s):  
P. A. Harou
Keyword(s):  
Discount Rate ◽  
Opportunity Cost ◽  
Cost Of Capital ◽  
Shadow Price ◽  
Social Benefits ◽  
Review Of The Literature ◽  
Social Discount Rate ◽  
The Social ◽  
Forestry Investments ◽  
Present Worth

After a review of the literature on the discount rate in economics and forestry, a methodology is proposed to arrive at an appropriate social discount rate to appraise public forestry investments. In the proposed approach, the opportunity cost of capital is considered in the establishment of a shadow price of investment. The social discount rate, which should weight the project net social benefits through time, is an unknown of the net present worth equation set equal to zero.

scholarly journals THE PROBLEM OF DETERMINATION OF TECHNICAL AND ECONOMIC INDICATORS OF INDUSTRIAL DEVELOPMENT OF DRINKING SUBSURFACE WATER

2018 ◽  
pp. 96-99
Author(s):  
O. Luibchyk
Keyword(s):  
Feasibility Study ◽  
Discount Rate ◽  
Average Cost ◽  
Cost Of Capital ◽  
Underground Mining ◽  
Weighted Average ◽  
Subsurface Water ◽  
Groundwater Extraction ◽  
Trend Line ◽  
The Impact

The article analyzes the impact of changes to the Tax Code of Ukraine and the NBU discount rate on extraction, and profitability of enterprises for the use of groundwater for the period 2015-2017. Examples of inaccuracies in the formulation of domestic legislation on rent for the use of groundwater are given. The European experience of similar legislative norms is presented. The author summarized the table of changes in the rate for special use during 2015-2017, a trend was observed on the basis of which a trend line was constructed with the forecast of this rate for 25 years. The trend line equation will help calculate the rate for any period that will better predict the risks of the project when calculating the feasibility study for groundwater extraction. It is revealed that in the national practice of the feasibility study for underground mining, the calculation of net discounted profit (NPV) is based on the method of the weighted average cost of capital of the enterprise. The discount rate (E) is taken in accordance with the discount rate of the NBU. An analysis of changes in the discount rate for the period 2015-2017 was conducted, histogram was constructed for clarity. The histogram analysis showed that the NBU discount rate often changes and, besides, its change is difficult to predict – this situation restricts the use of the method of weighted average cost of capital for the calculation of net discounted profit in the feasibility study of groundwater extraction.

Evaluation of the discount rate for oil and gas companies

2020 ◽  
Author(s):  
Danna B. Niyazbekova ◽  
◽  
Anna V. Komarova ◽  
Keyword(s):  
Discount Rate ◽  
Average Cost ◽  
Oil And Gas ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Financial Asset ◽  
Asset Valuation ◽  
Factors Affecting ◽  
Valuation Model ◽  
Oil And Gas Companies

The aim of the work is to justify the calculation of the discount rate and assess the factors affecting it for oil and gas companies. Based on the results of the study, discount rates for nine oil and gas companies were calculated and compared in three ways: the financial asset valuation model (CAPM), the weighted average cost of capital model (WACC), and the cumulative method. An econometric analysis of the discount rate is carried out.

scholarly journals Pengembangan Model Fuzzy Project Evaluation Untuk Analisis Kelayakan Finansial Pendirian Pabrik Baru

2015 ◽  
Vol 1 (1) ◽  
pp. 22
Author(s):  
Yuniar Farida
Keyword(s):  
Discount Rate ◽  
Fuzzy Number ◽  
Average Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Project Evaluation ◽  
Triangular Fuzzy Number ◽  
Present Value

Untuk rencana pembangunan suatu pabrik baru, aspek finansial merupakan aspek terpenting dalam evaluasi kelayakannya. Dikatakan demikian, karena sekalipun aspek lain tergolong layak, jika studi aspek finansial memberikan hasil yang tidak layak, maka usulan proyek akan ditolak karena tidak memberikan manfaat ekonomi. Dalam penelitian ini Net Present Value (NPV) digunakan sebagai metode evaluasi kelayakan finansial rencana pendirian pabrik PT. X. Dalam perhitungan NPV, salah satu faktor yang krusial adalah tarif diskonto atau discount rate yang berlaku pada masa pengembalian investasi suatu proyek. NPV suatu proyek harus dihitung dengan discount rate konstan sampai masa pengembalian investasi, meski pada kenyataannya faktor – faktor yang mempengaruhi discount rate setiap tahun tidak selalu sama, akibatnya nilai NPV menjadi samar (fuzzy). Untuk mengatasi hal tersebut, maka dilakukan suatu pemodelan untuk mendekati nilai discount rate yang tepat. Dalam penelitian ini discount rate dihitung berdasarkan nilai WACC (Weighted Average Cost of Capital) yang merupakan gabungan dari struktur modal, yaitu hutang dan ekuitas. Untuk memperoleh nilai WACC yang tepat, dilakukan pendekatan dengan menggunakan Triangular Fuzzy Number (TFN). Adapun penggunaan fuzzy dilakukan karena WACC mengandung unsur ketidakpastian yang tinggi, yang bisa membuat perhitungan WACC dengan metode konvensional menjadi samar/kabur. Dari hasil perhitungan menggunakan TFN, diperoleh nilai WACC sebesar 13.64 % dan menghasilkan NPV sebesar 6,430,464,000,000. Sedangkan nilai WACC deterministik yang dihasilkan evaluator sebesar 13.72 % dan menghasilkan NPV sebesar 6,358,310,540,000

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