The discount rate is the interest rate used for reduction of future cash flows so far. Its calculation – one of the most difficult and topical issues in the course of financial assessment of investment projects.
Instruction
1. Before starting calculation ratesof discounting, consider that there are several methods of its definition. The most widespread is the method of assessment of capital assets. It is based on the analysis of change of yield on the stocks which are freely traded on the market. The discount rate is defined as follows: I = R + β (Rm-R) + x + at +f, gder – a risk-free rate of profitability. As it the rate on deposits of bank and also a rate according to the state debt obligations is accepted; β – the coefficient which is a measure of systematic risk and characterizing a macroeconomic situation in the country. Actually it represents the attitude of variability of share price of the company towards variability of this indicator on the market in general; Rm is the average yield on the stock in the market; x – the award considering risk of an investment in subjects of small business; at – the award considering a lack of information on the considered project; f – the award considering stanovy risk.
2. One more method which you can use for calculation of a discount rate is a method of determination of weighted average cost of capital. It is based on the assumption that an alternative of an investment of funds of the enterprise is financing of its own activity. In this case the discount rate is defined as follows: I = Кd(1-Тc) Wd + Kp*Wp + Ks*Ws, gdekd – the cost of the loan capital; The CU is income tax rate; Kr – the cost of the share capital (preference shares); Ks is the cost of the share capital (common stocks); Wd is a share of the loan capital in the total amount of the capital; Wp is a share of preference shares; Ws is a share of common stocks.
3. You can find a discount rate also cumulative method, or method of expert evaluations: I = R +ΣGi, gder – a risk-free rate; j – amount of the considered investment risks; Gj is an award for each risk. A lack of this method is his subjectivity as the risk level and a payment for it is defined on the basis of opinion of experts.