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 - Extensions

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.