Time Variation in Cash Flows and Discount Rates

2017 ◽  
Author(s):  
Tolga Cenesizoglu
Keyword(s):  
Time Variation ◽  
Cash Flows ◽  
Discount Rates

scholarly journals Individual Time Preferences and Energy Efficiency

2015 ◽  
Vol 105 (5) ◽  
pp. 196-200 ◽  
Author(s):  
Richard G. Newell ◽  
Juha Siikamäki
Keyword(s):  
Energy Efficiency ◽  
Policy Evaluation ◽  
Cash Flows ◽  
Time Preferences ◽  
Discount Rates ◽  
Product Choices ◽  
Key Driver ◽  
Flows Over Time ◽  
Efficiency Gap

We examine the role of individual discount rates in energy efficiency decisions using evidence from an extensive survey of US homeowners to elicit preferences for energy efficiency and cash flows over time. We find considerable heterogeneity in individual discount rates. We also find that individual time preferences systematically influence willingness to invest in energy efficiency, as measured through product choices, required payback periods, and energy efficiency tax credit claims. Education is a key driver of individual discount rates. Our findings highlight the importance of individual discount rates to understanding energy efficiency investments, the energy-efficiency gap, and policy evaluation.

Using the Time Value of Money Decision Tree to Calculate an Athlete’s Contract Offers

2017 ◽  
Vol 6 (1) ◽  
pp. 48-57
Author(s):  
B. David Tyler
Keyword(s):  
Critical Thinking ◽  
Decision Tree ◽  
Professional Sports ◽  
Cash Flows ◽  
Discount Rates ◽  
Deferred Compensation ◽  
Time Value Of Money ◽  
Time Value ◽  
The Impact ◽  
Value Of Money

Time Value of Money (TVM) is an essential concept within finance, yet its fundamentals confuse many students. This case offers the TVM Decision Tree to guide students to logical solutions through a step-by-step approach that requires critical thinking about cash flows. Students follow a sport agent as she reviews contract offers for her client. She received four offers with payments structured in wildly different ways, including single payments, growing annuities, and delayed annuities. She must use her knowledge of TVM and the TVM Decision Tree to determine which contract will provide her client with the largest contact in terms of PV. She will find that the contracts with the largest nominal values are not necessarily worth the most in terms of PV. She will also see the impact that different discount rates can have in making her decisions, as well as learn about deferred compensation within professional sports.

scholarly journals The structure of the distributions of cash flows and discount rates in multiperiod valuation problems

OR Spectrum ◽  
2005 ◽  
Vol 28 (2) ◽  
pp. 289-299 ◽  
Author(s):  
Jörg Laitenberger ◽  
Andreas Löffler
Keyword(s):  
Cash Flows ◽  
Discount Rates

A New Approach to Capital Budgeting in Closely-Held Firms and Small Firms

1981 ◽  
Vol 5 (4) ◽  
pp. 30-35 ◽  
Author(s):  
Thomas H. McInish ◽  
Ronald J. Kudla
Keyword(s):  
Small Firms ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Separation Principle ◽  
Discount Rates ◽  
Present Value ◽  
Investor Returns

The traditional application of the net present value method in capital budgeting involves the use of market derived discount rates such as the cost of capital. Justification of these discount rates stems from the separation principle that states that investment decisions can be made independent of shareholders' tastes and preferences. The purpose of this paper is to show that the separation principle does not hold for closely-held firms and small firms, and, accordingly, market-derived discount rates are inappropriate. Two capital budgeting techniques which are appropriate for these firms are presented. Accept/reject decisions for capital budgeting projects are often made using a technique known as “net present value” (NPV).1 Using the NPV method, acceptable projects are those for which the project's cost is less than the present value of the project's cash flows discounted at the firm's cost of capital; in other words, acceptable projects have a positive NPV. The firm's cost of capital is usually taken to be the weighted average of the firm's cost of equity and debt as measured by investor returns in the capital markets. Justification for use of a discount rate, determined by reference to market-wide investor returns, is based on “the separation principle” which asserts that corporations can make capital budgeting decisions independently of their shareholders' views.2 But because a critical assumption of the separation principle is that shares are readily marketable, it is likely that the separation principle and, hence, market-determined discount rates are inappropriate for closely-held firms and small firms.3 In this paper, we discuss two capital budgeting approaches which are applicable to firms whose shares are not readily marketable. This paper is divided into five sections. First, we discuss the traditional net present value approach to capital budgeting and, then, we indicate in detail, why it may not be suitable for use by closely-held firms and small firms. In the third and fourth sections, we explain two capital budgeting techniques which may be appropriate for use by these firms. Finally, we summarize our conclusions.

Project Valuation: Price Forecasts Bound to Discount Rates

2021 ◽  
Author(s):  
Babak Jafarizadeh ◽  
Reidar B. Bratvold
Keyword(s):  
Cash Flows ◽  
Capital Asset Pricing ◽  
Discount Rates ◽  
Capital Asset ◽  
Risk Premiums ◽  
Asset Pricing Model ◽  
Project Valuation ◽  
Hurdle Rate ◽  
Future Cash Flows

For their appraisals, most companies use discount rates that account for timing and riskiness of projects. Yet, especially for commodity projects, discounting future cash flows is generally at odds with the assumptions in a company’s hurdle rate. With a multitude of technical and market uncertainties, inconsistent assessments lead to biased valuations and poor investment decisions. In this paper, we consider price forecasts and discount rates in an integrated framework. We calibrate the risk premiums in a two-factor stochastic price process with a capital asset pricing model-based discount rate. Together with the analysts’ long-term prices forecasts, the suggested method improves consistency in valuation and decision making.

scholarly journals Very Long-Run Discount Rates *

2014 ◽  
Vol 130 (1) ◽  
pp. 1-53 ◽  
Author(s):  
Stefano Giglio ◽  
Matteo Maggiori ◽  
Johannes Stroebel
Keyword(s):  
Housing Markets ◽  
Cash Flows ◽  
Data Sets ◽  
Discount Rates ◽  
Present Value ◽  
Price Discounts ◽  
The United Kingdom ◽  
Long Run ◽  
Uncertain Future ◽  
The Universe

Abstract We estimate how households trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the United Kingdom and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, prepaid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The price difference between leaseholds and freeholds reflects the present value of perpetual rental income starting at leasehold expiration, and is thus informative about very long-run discount rates. We estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long-run leaseholds via hedonic regressions using proprietary data sets of the universe of transactions in each country. Households discount very long-run cash flows at low rates, assigning high present value to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued at more than 10% less than otherwise identical freeholds, implying discount rates below 2.6% for 100-year claims.

Post- to Pre-Tax Discount Rates: Not a Simple Conversion

2019 ◽  
Vol 14 (1) ◽  
Author(s):  
Richard Hayler
Keyword(s):  
Financial Markets ◽  
Discount Rate ◽  
Cash Flows ◽  
Iterative Approach ◽  
Discount Rates ◽  
Tax Rate ◽  
Life Project ◽  
Realistic Assumption ◽  
Simple Conversion

Abstract It is widely accepted that financial markets tend to make assessments of value on expectations of post-tax cash flows, since that is what equity investors receive. There is however, from time to time, a need to ascertain and apply a pre-tax discount rate to discount pre-tax cashflows. Examples include (i) the assessment of regulatory returns and (ii) impairment testing of cash generating units. This paper highlights the implicit assumptions inherent in the most commonly applied shorthand method of determining pre-tax discount rates before considering modifications to create a more realistic assumption set. The paper concludes with the derivation of a shorthand formula for finite life project cashflows, which often require a pre-tax discount rate. The author agrees that while all the cash flows should be modelled on a post-tax basis and then back solved, using an iterative approach, to find the actual pre-tax rate, where a shorthand is required the formulae discussed in this paper can be applied, provided the limitations are understood.

scholarly journals The Role of Discounting in Energy Policy Investments

Energies ◽  
2021 ◽  
Vol 14 (19) ◽  
pp. 6055
Author(s):  
Gabriella Maselli ◽  
Antonio Nesticò
Keyword(s):  
Energy Policy ◽  
Discount Rate ◽  
Cash Flows ◽  
Quality Parameter ◽  
Economic Evaluations ◽  
Discount Rates ◽  
Sustainable Investment ◽  
Climate Neutrality ◽  
Over Time

For informing future energy policy decisions, it is essential to choose the correct social discount rate (SDR) for ex-ante economic evaluations. Generally, costs and benefits—both economic and environmental—are weighted through a single constant discount rate. This leads to excessive discounting of the present value of cash flows progressively more distant over time. Evaluating energy projects through constant discount rates would mean underestimating their environmental externalities. This study intends to characterize environmental–economic discounting models calibrated for energy investments, distinguishing between intra- and inter-generational projects. In both cases, the idea is to use two discounting rates: an economic rate to assess financial components and an ecological rate to weight environmental effects. For intra-generational projects, the dual discount rates are assumed to be constant over time. For inter-generational projects, the model is time-declining to give greater weight to environmental damages and benefits in the long-term. Our discounting approaches are based on Ramsey’s growth model and Gollier’s ecological discounting model; the latter is expressed as a function of an index capable of describing the performance of a country’s energy systems. With regards to the models we propose, the novelty lies in the calibration of the “environmental quality” parameter. Regarding the model for long-term projects, another innovation concerns the analysis of risk components linked to economic variables; the growth rate of consumption is modelled as a stochastic variable. The defined models were implemented to determine discount rates for both Italy and China. In both cases, the estimated discount rates are lower than those suggested by governments. This means that the use of dual discounting approaches can guide policymakers towards sustainable investment in line with UN climate neutrality objectives.

Sign in / Sign up

Export Citation Format

Share Document