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Risk-Adjusted Discount Rates Revisited

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  • Gallagher, Timothy J
  • Zumwalt, J Kenton

Abstract

This paper shows that small changes in even slightly negative discount rates can cause substantial changes in present value. Small changes in the discount rate, which may seem appropriate, turn out to have huge effects on present value and are not economically justified. This paper also points out problems associated with large negative discount rates. It is shown that the present value can become discontinuous as the discount rate is lowered and that the present value of the risky cash outflows becomes erratic depending on whether the outflow is discounted an even or odd number of periods. Copyright 1991 by MIT Press.

Suggested Citation

  • Gallagher, Timothy J & Zumwalt, J Kenton, 1991. "Risk-Adjusted Discount Rates Revisited," The Financial Review, Eastern Finance Association, vol. 26(1), pages 105-114, February.
    • Handle: RePEc:bla:finrev:v:26:y:1991:i:1:p:105-14
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