Financial Discount Rates in Project Appraisal
Harvard Institute for International Development Working Paper No. 706
40 Pages Posted: 24 Jan 2000
Date Written: June 1999
Abstract
In the financial appraisal of a project, the cashflow statements are constructed from two points of view: the Total Investment (TI) Point of View and the Equity Point of View. One of the most important issues is the estimation of the correct financial discount rates for the two points of view. In the presence of taxes, the benefit of the tax shield from the interest deduction may be excluded or included in the free cashflow (FCF) of the project. Depending on whether the tax shield is included or excluded, the formulas for the weighted average cost of capital (WACC) will be different. In this paper, using some basic ideas of valuation from corporate finance, the estimation of the financial discount rates for cashflows in perpetuity and single-period cashflows will be illustrated with simple numerical examples.
Note: The Vietnamese version is available to download at: http://ssrn.com/abstract=437002
JEL Classification: D61, G31, H43
Suggested Citation: Suggested Citation
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