Discounted Cash Flow (DCF)

Discounted Cash Flow (DCF) is a very common valuation method used to assess the financial viability of a proposed project. A very important variable in DCF is the discount rate.

(a) Discuss the elements of a discount rate, that is, what does a discount rate “discounts”?
(50 marks)

(b) Explain how the Capital Asset Pricing Model (CAPM) could be used to estimate the discount rate, and critically describe the assumptions and limitations of the Model and its application in estimating the discount rate for the financial feasibility study of a construction project. (50 marks)

Sample Solution