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 language | English |
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Pages (from-to) | 139-152 |
Number of pages | 14 |
Journal | Decision Analysis |
Volume | 18 |
Issue number | 2 |
Early online date | 17 May 2021 |
DOIs | |
Publication status | Published - Jun 2021 |
Keywords
- Application in petroleum industry
- CAPM
- Commodity price uncertainty
- Project appraisal
- Risk neutral
- Risk premiums
ASJC Scopus subject areas
- Decision Sciences(all)