Question on discount rate for DCF analysis for project

tempusfugit's picture
Rank: Chimp | banana points 2

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.

Comments (4)

Jul 10, 2013
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Jul 11, 2013

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

Jul 11, 2013
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.

Jul 11, 2013

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