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The Discount Rate in the Assessment of EU Funded Investment Projects

Author

Listed:
  • Dochka Velkova
  • Yana Kirilova

Abstract

The article presents the effect of the financial discount rate on key financial indicators in the cost-benefit analysis used in the assessment of public investment projects – financial net present value, financial internal rate of return and financial gaps. It then estimates the Weighted Average Cost of Capital as an alternative approach for determining the discount rate. The model builds on the debt/equity ratio in the overall project investment portfolio and Capital Asset Pricing Model based on: (1) the return gained from investment in risk-free instruments; (2) the risk premium for the state (the so-called asymmetric state-related risk); (3) the business risk premium; (4) the project asymmetric risk premium. The model is then applied to an environmental investment project in Bulgaria.

Suggested Citation

  • Dochka Velkova & Yana Kirilova, 2023. "The Discount Rate in the Assessment of EU Funded Investment Projects," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 135-148.
    • Handle: RePEc:bas:econst:y:2023:i:4:p:135-148
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    File URL: https://www.iki.bas.bg/Journals/EconomicStudies/2023/2023-4/09_Dochka-Yana.pdf
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    References listed on IDEAS

    as
    1. Frank, Murray Z. & Shen, Tao, 2016. "Investment and the weighted average cost of capital," Journal of Financial Economics, Elsevier, vol. 119(2), pages 300-315.
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    Cited by:

    1. Annie Dimitrova, 2023. "Trends in the Development of the Structure of the Agricultural Holdings in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 191-204.

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    More about this item

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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