Financial Discount Rates in Project Appraisal

Harvard Institute for International Development Working Paper No. 706

40 Pages Posted: 24 Jan 2000

See all articles by Joseph Tham

Joseph Tham

Educational Independent Consultant

Date Written: June 1999

Abstract

In the financial appraisal of a project, the cashflow statements are constructed from two points of view: the Total Investment (TI) Point of View and the Equity Point of View. One of the most important issues is the estimation of the correct financial discount rates for the two points of view. In the presence of taxes, the benefit of the tax shield from the interest deduction may be excluded or included in the free cashflow (FCF) of the project. Depending on whether the tax shield is included or excluded, the formulas for the weighted average cost of capital (WACC) will be different. In this paper, using some basic ideas of valuation from corporate finance, the estimation of the financial discount rates for cashflows in perpetuity and single-period cashflows will be illustrated with simple numerical examples.

Note: The Vietnamese version is available to download at: http://ssrn.com/abstract=437002

JEL Classification: D61, G31, H43

Suggested Citation

Tham, Joseph, Financial Discount Rates in Project Appraisal (June 1999). Harvard Institute for International Development Working Paper No. 706, Available at SSRN: https://ssrn.com/abstract=204010 or http://dx.doi.org/10.2139/ssrn.204010

Joseph Tham (Contact Author)

Educational Independent Consultant ( email )

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