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Discount Rate for New Projects

Discount Rate for New Projects

Discount Rate for New Projects

(OP)
I'm modeling a very large project ($billions).  What sort of range of discount factor for cash flow in investment does industry typically use for mammoth projects?  I assumed a factor of 8%; but I'd like some other advice.  This project is akin to something in the oil and gas refining sector (although not exactly).

Thanks all...

RE: Discount Rate for New Projects

Your client should be able to advise you of their discount rate protocol for investment evaluation.  If not, I suggest that you model a range of discount rates between 8 and 10%.

If the project is to be funded from equity -- i.e. from share issues or retained earnings -- the cost of equity (RE) may be a suitable discount rate.  However, if the project is to be funded from a mixture of debt and equity, the weighted average cost of capital (WACC) is probably a suitable discount rate.

A very large resources company that I worked for used a discount rate of just over 6%.  By comparison, a junior resources company that I worked for used a discount rate of 10%.

RE: Discount Rate for New Projects

Some use origin country Prime plus or LIBOC plus.  The plus is a risk factor based value ranging from .5% to 5% based on the probabilty of the project sucess and contracts.

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