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Discount rate? |
am designing a financing structure for a infrastructure finance. The implied irr is 12.5% over the life without capital gains. The implied risk premium is 7% which is similar to another similar investment that generate total returns of 20% including capital gains. The return on this type of investment is influenced by inflation and interest rates but it still outperform the market in the long run. Use the 20% because the investments are similar. As read, I understand that the "implied" discount rate would be 19.5% (12.5% plus 7% premium). The two numbers are pretty close, as stated in the problem that they are "similar." I would use 20%, though, since when you have a new project you would use the discount rate that corresponds to the project. (For example, if an airline manufacturing company uses a discount rate of 30% and are thinking of investing in petroleum, they would use the discount rate that corresponds to the petroleum business, rather than their own.) |
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