Conceptual Problems in the Use of Risk-adjusted Discount Rates. The Journal of Finance, 21, p.
The difficulty of considering continuous processes, as well as the problem of determining the premium for risk, discourage common use of the risk-adjusted discount rate method.
Use Risk-Adjusted Discount Rates
. Consider applying different discount rates for different asset classes.
Table 2 shows the risk-adjusted discount rates for various input values.
(2000) established a risk-adjusted discount rate for a supply chain network model, but not for a specific facility.
(15) The proposition that risk-adjusted discount rates
and certainty equivalents yield identical net present values is shown in Stapleton (1971).
Unrealistic risk-adjusted discount rates
serve only to place doubt on the real meaning of the net present value (NPV).
This further allows the use of appropriately risk-adjusted discount rates
for each class of cash flows to be used, leading to a more precise and accurate valuation framework.
Schachter, 1989, "The Investment Decision: Estimation Risk and Risk-Adjusted Discount Rates
," Financial Management (Winter), 13-22.
Cummins (1988b) develops risk-adjusted discount rates
for risky insurance policies, i.e., policies issued by firms that can become bankrupt.
Pringle, "Risk-Adjusted Discount Rates
Financial theorists agree that using a correct risk-adjusted discount rate
is needed to analyze a company's potential investments and evaluate overall or divisional performance.