Determining the Size of Discount Rate for the Purposes of Investment Design and Evaluation of Business: on the Difference in Approaches to Calculation and Application

Abstract

The purpose of this article is to theoretically and practically solve the problem of different approaches to determining and applying the correct discount rate for investment design and business valuation purposes. As a result of applying the inversion method within the framework of a paired comparative analysis, basic principles of practical setting and application of an adequate and correct discount rate were revealed, namely: the principle of accounting for the temporary nature of alternative incomes, the principle of accounting for the nature of investments, the principle of determining management bifurcation points, and the principle of accounting for the nature of the discount. Eash of these causes a different, and often directly opposite, interpretation of the theoretical provisions of lost profits, depending on the scope application of the discount rate. The theoretical premises were fully confirmed by methodological analysis of one of the most popular models of setting the discount rate, CAPM. The results of research are not only of theoretical and methodological importance, but also of high practical importance. Their scope is not limited to the use of a discount rate approach: the results of this study can and should be applied in all cases when there is the question of quantifying the coefficients of reduction in applied investment and economic calculations.