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Multiperiod Financial Discount Rates in Project Appraisal


  • Tham, J.


The typical assumption about cash flows in perpetuity is not appropriate in practical project appraisal because the length of project life is always finite. In this paper, I present and discuss the calculation of multiperiod financial discount rates for a project with a finite life and no personal taxes. The impact of corporate taxes and inflation will also be included in the analysis. With financing, there are two possible profiles. 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, we can explicitly model the cashflow statement from the Total Investment Point of View (CFS-TIP) and the Equity Point of View (CFS-EPV). It is not necessary to assume that the debt-equity ratio is constant and the cash flows are in perpetuity.

Suggested Citation

  • Tham, J., 1999. "Multiperiod Financial Discount Rates in Project Appraisal," Papers 712, Harvard - Institute for International Development.
  • Handle: RePEc:fth:harvid:712

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    References listed on IDEAS

    1. Chen, B.-L. & Lin, C.-F. J. & Yang, X., 1999. "Empirical Evidence for the Endogenous Growth Generated by Evolution in Division of Labor," Papers 671, Harvard - Institute for International Development.
    2. Lee, Jong-Wha & Barro, Robert J, 2001. "Schooling Quality in a Cross-Section of Countries," Economica, London School of Economics and Political Science, vol. 68(272), pages 465-488, November.
    3. Dennis, Benjamin & Kandel, Simon, 2000. "Holding Out for a Haircut: Financial Crisis, Moral Hazard, and Interest Rate Policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(3), pages 233-249, July.
    4. Glenn Jenkins & HENRY LIM & GANGADHAR SHUKLA, 1999. "Evaluation Of An Expansion Of The Electricity Transmission System In Mexico," Development Discussion Papers 1999-05, JDI Executive Programs.
    5. Khoo, L. & Dennis, B., 1999. "Income Inquality, Fertility Choice, and Economic Growth: Theory and Evidence," Papers 687, Harvard - Institute for International Development.
    6. MIGARA JAYAWARDENA & Glenn Jenkins & GANGADHAR SHUKLA, 1999. "Control Of Water And Coastal Pollution An Appraisal For Espirito,Brazil," Development Discussion Papers 1999-04, JDI Executive Programs.
    7. Glenn Jenkins & HENRY LIM, 1998. "Evaluation Of Investments For The Expansion Of An Electricity Distribution System," Development Discussion Papers 1998-01, JDI Executive Programs.
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    More about this item



    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate


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