Reconciling the Term Structures of Corporate and Social Discount Rates

25 Pages Posted: 3 Feb 2015

Date Written: February 2, 2015

Abstract

Studies in both corporate fi…nance and environmental economics have described how discount rates should vary with the maturity of a project. The former suggests that the cost of capital should increase with the time horizon of the cash flow, while the latter recommends declining term structures of social discount rates. This paper presents a reconciliation and generalization of these two literatures and illustrates the complex interaction between the shape of the term structure and the present value of long-lived projects. In particular, it is demonstrated that the increasing term structure of risky discount rates does not necessarily reduce our willingness to pay for assets with uncertain far-horizon cash ‡flows.

Keywords: Long-term Projects, Discount Rates, Valuation, Net Present Value

JEL Classification: G31, H43, H54, Q51

Suggested Citation

Freeman, Mark, Reconciling the Term Structures of Corporate and Social Discount Rates (February 2, 2015). Available at SSRN: https://ssrn.com/abstract=2559203 or http://dx.doi.org/10.2139/ssrn.2559203

Mark Freeman (Contact Author)

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

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