Project Valuation: Price Forecasts Bound to Discount Rates

Babak Jafarizadeh, Reidar B. Bratvold

Research output: Contribution to journalArticlepeer-review

53 Downloads (Pure)

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.
Original languageEnglish
Pages (from-to)139-152
Number of pages14
JournalDecision Analysis
Volume18
Issue number2
Early online date17 May 2021
DOIs
Publication statusPublished - Jun 2021

Keywords

  • Application in petroleum industry
  • CAPM
  • Commodity price uncertainty
  • Project appraisal
  • Risk neutral
  • Risk premiums

ASJC Scopus subject areas

  • Decision Sciences(all)

Fingerprint

Dive into the research topics of 'Project Valuation: Price Forecasts Bound to Discount Rates'. Together they form a unique fingerprint.

Cite this