Sanford School of Public Policy
Duke University
Publications [#302940] of Joseph Tham
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- Tham, J. "Multiperiod Financial Discount Rates in Project Appraisal." (July, 1999).
(last updated on 2020/08/05)Abstract:
The typical assumption about cashflows in perpetuity is not appropriate in practical project appraisal because the length of project life is always finite. In this paper, I discuss the calculation of multiperiod financial discount rates for a project with a finite life. The impact of taxes and inflation will also be included in the analysis. First, we may assume that a constant debt-equity ratio is maintained during the life of the project. The loan schedule is constructed to keep the debt-equity ratio constant for the life of the project. Second, the loan schedule may be fixed. In this case, the debt-equity ratio changes over the life of the project. By explicitly calculating the appropriate discount rate for each period, it is not necessary to assume that the debt-equity ratio is constant and the cashflows are in perpetuity.