Choosing the Discount Rate

Choosing the Discount Rate - Choosing the Discount Rate As...

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Choosing the Discount Rate 1 As always, the appropriate discount rate is based on the riskiness of the cash flows. WACC is used for long-term decisions, but is not always appropriate for short-term decisions. Risk for short-term decisions is negligible, ambiguous, or both.
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Choosing the Discount Rate 2 One-Shot Project Many one-shot projects do not require a NPV analysis. If the analysis is done, use the firm’s short- term borrowing (investing) rate. If risk-free, use the 3-month T-bill rate. Multi-Year Project Projects with multi-year effects, particularly
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Project Life & Adjusted Discount Rate 3 For multi-year projects , make a risk adjustment, as follows: k adj = k rf + k avg + k WACC Where: k = Annual rate k adj
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This note was uploaded on 01/24/2012 for the course FIN 4260 taught by Professor Victorwakeling during the Spring '12 term at Kennesaw.

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Choosing the Discount Rate - Choosing the Discount Rate As...

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