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.

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Comments (9)

Best Response
Aug 20, 2017

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?
    • 2
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Aug 23, 2017

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.

Aug 23, 2017

Maria-Lopez, bummer your thread hasn't had a response yet. Sometimes bots are smarter than humans anyways:

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Calling relevant pros to the rescue! @Oereich @johnrosa8 @Brian-Roland

I hope those threads give you a bit more insight.

Aug 23, 2017

Bump.

Aug 23, 2017

If it's 100pct debt financed wouldn't your discount rate just be your cost of debt?

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Aug 23, 2017
mrb87:

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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Aug 23, 2017

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