Project selection different discount rates
Hi, I hope this is a relevant section to post in if not please move it.
When comparing multiple projects is there a rule or 'correct' way to choose if they have different discount rates or can you straight up just compare the present values of the cash flows.
cheers.
You can't compare PVs of CFs based on different discount rates. Do this:
Check if the companies are in the same industry
If they are why are the discount rates different?
What is the risk profile of the 2 companies?
Discount rate varies by company. But if you're trying to compare two projects by NPV, for instance, you need to evaluate them using the same discount rate.
Discount Rate (Originally Posted: 02/05/2018)
How could a project manager adjust the cost of capital (i.e., discount rate) to increase the likelihood of having his/her project accepted? Is this ethical or financially sound?
Maria-Lopez, bummer your thread hasn't had a response yet. Sometimes bots are smarter than humans anyways:
Calling relevant pros to the rescue! Oereich @johnrosa8" Brian-Roland
I hope those threads give you a bit more insight.
Question on discount rate for DCF analysis for project (Originally Posted: 07/09/2013)
I’m working on a Discounted Cash Flow analysis for a cement grinding plant. I’m not sure where to get the discount rate from.
The plant is being evaluated as a project with a 25 year life. It will be a stand-alone entity, not part of a larger company. It will be 100% debt financed. Payment on the debt will begin after two years (no payments during construction phase) and will be paid back in five years (not counting the two year grace period, so seven years after the beginning on the project).Should I be using APV for this? If so, I know I would use the interest rate on the debt to calculate the NPV of the interest tax shield. But what discount rate should I use for the NPV of the project? I have calculated the unlevered betas of three cement companies and averaged those (although I wasn’t sure what counts as debt for that: would lease obligations count?). Should I simply plug that beta number into CAPM to get my discount rate for the project cash flows? Any help would be greatly appreciated.
Bump.
If it's 100pct debt financed wouldn't your discount rate just be your cost of debt?
This.
Your cash flow shouldn't show anything from the new project during the construction phase, unless it somehow generates cash flow based on a percentage of completion.
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