Re: Discount Rate Question

Rob Bain wrote:
Hi

If I have the NPV of a cash stream calculated with a discount rate of
8%, and the NPV of the same cash stream calculated using 6%, can I
calculate the NPV at 3.5%?

I don't think this is possible (no unique solution) - but I'd be very
interested in members' views. Is there, for example, an 'approximate'
or 'most likely' solution???

Thanks,

Rob


30 years ... only two "inputs" ... here is a brute way:

If I understand correctly you want to know the interal rate
of return having two different inputs, time is 30 years, yes?

Here is a brute way:

Determine r1, such that exp(-r1 * t ) = your first NPV and r2
your 2nd NPV (same formula, t = 30) using the log function.

Now take paper and pencil and draw a simple diagram, x-axes
is for your given rates, y-axes for the r. Your 2 solutions
are 2 points, connect them by a line. Now take you 3.5% at
the x-axes and find what r belongs to it using the graph (and
of course you can do it using Excel or setting up equations
as well).

If the r for the 3.5 is *negative* (or more generally: if the
line connecting your 2 given points meets the y-axes "too far"
below 0) it means: you have to aware of additional factors
which you do not know. In this case you have not much chance
for a reasonable estimation, you may want more input or have
to give up (of course there will be external effects).

Otherwise - if it looks more or less reasonable - feeding that
solution gives you a rough guess exp( -r * t) for your NPV.

You may want to cross-check by looking for quotations of some
zerobonds at the newspaper (or magazines or the www) and their
IIR (or aks your bank), do not forget to mention a desired
rating for the invest.

***

After having typed this I see it is commercial: highway projects.

Anyway: discounting is through term structure for interest rates
over livetime of your project and IIRC you can evaluate the
project as American option (due to default), additional data
is to be taken from comparable projects and you may look for
models used in oil industry.
.

Relevant Pages

  • RE: Offset function gives different answer in columns v Rows
    ... NPV function on its own works fine between rows and columns. ... I found that using different discount rates gives a different constant error ... but cannot figure out the correlation between discount rate and the constant. ... I used the Offset function to allow for NPV on different dates. ...
    (microsoft.public.excel.worksheet.functions)
  • RE: Offset function gives different answer in columns v Rows
    ... NPV is very sensitive to the number of decimal place accuracy of the numbers. ... I found that using different discount rates gives a different constant error ... but cannot figure out the correlation between discount rate and the constant. ... I used the Offset function to allow for NPV on different dates. ...
    (microsoft.public.excel.worksheet.functions)
  • Re: IRR
    ... what are the two values of discount rate which give ... Can you get IRR to work using these numbers? ... IRR is the rate for which the NPV is zero. ... You could certainly analyze your investment by looking at total outflow vs ...
    (microsoft.public.excel.worksheet.functions)
  • Re: NPV vs XNPV
    ... Errata .... ... the same result as the standard NPV calculation?" ... my speculation about the exact daily computation of XNPV ...
    (microsoft.public.excel.worksheet.functions)
Quantcast