Multiperiod Financial Discount Rates in Project Appraisal

Harvard Institute for International Development Working Paper No. 712

28 Pages Posted: 24 Jan 2000

See all articles by Joseph Tham

Joseph Tham

Educational Independent Consultant

Date Written: July 1999

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.

JEL Classification: D61, G31, H43

Suggested Citation

Tham, Joseph, Multiperiod Financial Discount Rates in Project Appraisal (July 1999). Harvard Institute for International Development Working Paper No. 712, Available at SSRN: https://ssrn.com/abstract=204011 or http://dx.doi.org/10.2139/ssrn.204011

Joseph Tham (Contact Author)

Educational Independent Consultant ( email )

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