Discount Rate for New Projects 1

[bonzoboy]

I'm modeling a very large project ($billions). What sort of range of discount factor for cash flow in investment does industry typically use for mammoth projects? I assumed a factor of 8%; but I'd like some other advice. This project is akin to something in the oil and gas refining sector (although not exactly).

Thanks all...

 

[dbuzz]

Your client should be able to advise you of their discount rate protocol for investment evaluation. If not, I suggest that you model a range of discount rates between 8 and 10%.

If the project is to be funded from equity -- i.e. from share issues or retained earnings -- the cost of equity (R[sub]E[/sub]) may be a suitable discount rate. However, if the project is to be funded from a mixture of debt and equity, the weighted average cost of capital (WACC) is probably a suitable discount rate.

A very large resources company that I worked for used a discount rate of just over 6%. By comparison, a junior resources company that I worked for used a discount rate of 10%.

 

[dcasto]

Some use origin country Prime plus or LIBOC plus. The plus is a risk factor based value ranging from .5% to 5% based on the probabilty of the project sucess and contracts.

 

[mjhoward]

If this tool is useful for you, I leave it:

http://www.discountingcashflow.com/