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Project Valuation: Price Forecasts Bound to Discount Rates

Author

Listed:
  • Babak Jafarizadeh

    (Heriot-Watt University, Edinburgh EH14 4AS, United Kingdom)

  • Reidar B. Bratvold

    (University of Stavanger, Stavanger 4036, Norway)

Abstract

For their appraisals, most companies use discount rates that account for timing and riskiness of projects. Yet, especially for commodity projects, discounting future cash flows is generally at odds with the assumptions in a company’s hurdle rate. With a multitude of technical and market uncertainties, inconsistent assessments lead to biased valuations and poor investment decisions. In this paper, we consider price forecasts and discount rates in an integrated framework. We calibrate the risk premiums in a two-factor stochastic price process with a capital asset pricing model-based discount rate. Together with the analysts’ long-term prices forecasts, the suggested method improves consistency in valuation and decision making.

Suggested Citation

  • Babak Jafarizadeh & Reidar B. Bratvold, 2021. "Project Valuation: Price Forecasts Bound to Discount Rates," Decision Analysis, INFORMS, vol. 18(2), pages 139-152, June.
    • Handle: RePEc:inm:ordeca:v:18:y:2021:i:2:p:139-152
    DOI: 10.1287/deca.2021.0428
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    References listed on IDEAS

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    Cited by:

    1. Tatiana Ponomarenko & Eugene Marin & Sergey Galevskiy, 2022. "Economic Evaluation of Oil and Gas Projects: Justification of Engineering Solutions in the Implementation of Field Development Projects," Energies, MDPI, vol. 15(9), pages 1-22, April.
    2. Babak Jafarizadeh, 2022. "Forecasts of Prices and Informed Sensitivity Analysis: Applications in Project Valuations," Decision Analysis, INFORMS, vol. 19(3), pages 205-219, September.
    3. Yeu-Shiang Huang & Min-Sheng Yang & Jyh-Wen Ho, 2022. "Bundling Decisions for Selling Multiple Items in Online Auctions," Decision Analysis, INFORMS, vol. 19(1), pages 44-62, March.

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