Project valuation: price forecasts bound to discount rates

Babak Jafarizadeh, Reidar B. Bratvold

Research output: Contribution to journalArticlepeer-review

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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 CAPM-based discount rate. Together with the analysts’ long-term prices forecasts, the suggested method improves consistency in valuation and decision making.
Original languageEnglish
JournalDecision Analysis
Publication statusAccepted/In press - 10 Feb 2021

Keywords

  • Risk Premiums;
  • Commodity Price Uncertainty;
  • Project Appraisal;
  • CAPM;
  • Risk-neutral;
  • Application in Petroleum Industry

ASJC Scopus subject areas

  • Decision Sciences (miscellaneous)
  • Business, Management and Accounting (miscellaneous)
  • Industrial and Manufacturing Engineering
  • Energy (miscellaneous)
  • Management Science and Operations Research

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