scholarly journals Determining the Generalized Discount Rate for Risky Projects

2020 ◽  
Vol 77 (1) ◽  
pp. 143-158
Author(s):  
Lanlan Luo ◽  
Shou Chen ◽  
Ziran Zou
Keyword(s):  
Discount Rate ◽  
Risky Projects

An appropriate risk addendum for risky projects

2016 ◽  
Vol 42 (6) ◽  
pp. 604-616 ◽  
Author(s):  
Pradip K. Bhaumik
Keyword(s):  
Discount Rate ◽  
Perceived Risk ◽  
Design Methodology ◽  
Cost Of Capital ◽  
Case Scenario ◽  
Content Type ◽  
Business Operations ◽  
Clear Guideline ◽  
Practical Implications ◽  
Risky Projects

Purpose – Despite many troublesome aspects in its use, the risk-adjusted discount rate has survived and continues to be extensively used by practitioners. While the appropriate discount rate for projects as risky as the current business operations of the firm can be estimated relatively easily as the firm’s cost of capital, no clear guideline is available for projects with a higher risk profile. The purpose of this paper is to evaluate an appropriate risk addendum for such risky projects. Design/methodology/approach – Extending the framework developed by Davies et al. (2012), the perceived risk in a project is captured by focussing on a downside case scenario and estimating its probability and severity. An expression is then developed for the risk addendum (as an addendum to the firm’s cost of capital) that can be used to find the value of a risky project. Findings – The risk addendum is found to depend only on the product of the probability (p) and the severity (d) of the downside case scenario and not on either of them individually It was also found that the risk addendum rises fast for projects with shorter lives and so is the highest for risky projects with short lives. Practical implications – Managers can use the expression derived to evaluate an appropriate risk addendum for risky projects. Originality/value – The paper suggests a simple framework to quantify the risk involved in a project and to evaluate an appropriate risk addendum.

Evaluation of Risky Projects

2012 ◽  
Author(s):  
Christian Gollier
Keyword(s):  
Cash Flow ◽  
Discount Rate ◽  
Risk Premium ◽  
Certainty Equivalent ◽  
Discount Rates ◽  
Risky Assets ◽  
Future Cash Flow ◽  
Short Overview ◽  
Risky Projects

This chapter provides a short overview of the main concepts, ideas, and tools that have been produced by more than fifty years of research in the evaluation of risky projects and risky assets. It is devoted to the analysis of the risk premium for risky projects that should be added to the discount rate for safe projects. Here, valuing risky projects introduces a new dimension to the theory of investment. We have shown that this new dimension can be treated by transforming each future cash flow into its certainty equivalent. By doing this, one is back to the problem of evaluating a safe project, and the discount rates discussed in this book can be used.

Using Discount Rate to Predict Treatment Effect and Relapse

2007 ◽  
Author(s):  
Yun Zhang ◽  
Min Yu ◽  
Xinyue Zhou ◽  
Jingjing Lin ◽  
Yi Ni
Keyword(s):  
Discount Rate ◽  
Treatment Effect

Establishment and Production Costs for Peach Orchards in Florida: Enterprise Budget and Profitability Analysis

EDIS ◽  
2017 ◽  
Vol 2017 (4) ◽  
Author(s):  
Ariel Singerman ◽  
Marina Burani Arouca ◽  
Mercy A. Olmstead
Keyword(s):  
Discount Rate ◽  
Production Costs ◽  
Fixed Costs ◽  
Average Price ◽  
Land Preparation ◽  
Profitability Analysis ◽  
Enterprise Budget ◽  
Marketable Fruit ◽  
Peach Orchard

The article summarizes the establishment and production costs, as well as the potential profitability of a peach orchard in Florida. Our findings show the initial investment required for a peach operation in Florida to be $6,457 per acre; the expense in land preparation and planting alone in year 1 is $2,541 per acre. Variable and fixed costs in years 2 through 15 average $5,680 per acre. As an example of profitability, when using a 10% discount rate, an operation yielding 6,525 (7,254) pounds of marketable fruit per acre during its most productive years obtains a positive NPV when the average price is $2.38 ($2.13) per pound.

Determining the discount rate when evaluating trade organizations: Some features

2020 ◽  
Vol 13 (1) ◽  
pp. 71-84
Author(s):  
E.A. Grigor'eva ◽  
A.S. Buzhikeeva
Keyword(s):  
Discount Rate ◽  
Economic Activity ◽  
Systems Approach ◽  
Market Value ◽  
Additional Risk ◽  
Evaluation Procedures ◽  
Analytical Research ◽  
Definition Of ◽  
Traditional Approaches

Subject. This article deals with the issues of determining the market value of the trading business, taking into account a number of characteristics. Objectives. The article aims to develop certain provisions of the methodology and practice of evaluating the business of trading organizations, namely, taking into account the additional risk of inventory feasibility when calculating the discount rate. Methods. For the study, we used a systems approach, and the cognition, and economic and analytical research methods. Results. The article presents a three-tiered classification of stocks and a definition of risk based on the criteria for dividing stocks by purpose, degree of implementation, and shelf life in accordance with the scale. Based on the classification, the article offers certain recommendations for determining the discount rate when evaluating trading organizations, aimed at taking into account additional risk. Conclusions. Various evaluation procedures within the framework of traditional approaches and methods in relation to trading organizations do not take into account risk specific to this type of economic activity. The proposed methodology for calculating the discount rate for trade organizations takes into account the features of their functioning.

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