ABSTRACT
As we have seen in Chapter 1, the selection of an appropriate discount rate is an important consideration, particularly in the case of longer projects. An organisation using inappropriately high discount rates risks rejecting viable projects and favouring short term projects over superior longer term projects. Conversely, an organisation using inappropriately low discount rates risks accepting projects with weak financial business cases. In practice, the exercise of prudence makes the former mistake more common than the latter. This chapter provides an overview of the issues associated with setting discount rates. It then concludes with short accounts of three other techniques associated with discounted cash flow models: internal rate of return, payback periods and present value cost (defined later in this chapter).
