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Thermodynamic Approach to the Discount Rate and Discounted Cash Flow Method

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  • Mieczysław Dobija

    (College of Management Sciences and Quality, Cracow University of Economics, 27 Rakowicka St., 31-510 Cracow, Poland)

  • Jurij Renkas

    (College of Management Sciences and Quality, Cracow University of Economics, 27 Rakowicka St., 31-510 Cracow, Poland)

Abstract

Current theories of the discount rate have a theoretical basis focused on risk; risk-free rate and risk premium. The basic component of the discount rate, the risk-free rate as purely empirical has a natural infirmity which consequently weakens the final theory. Similarly, the risk premium category is not theoretically perfect. The fundamental shortcoming is that the theory of the discount rate does not relate to fundamental knowledge of capital and the natural rate of its potential growth. Therefore, the purpose of the discussion is to justify the discount rate structure with the constant of potential growth of capital; a = 0.08 [1/year] as the main component. It is proven that the theory of the discount rate is linked to the essence of time and the pace of its passage and is an essential component of the capital–labor–time triad.

Suggested Citation

  • Mieczysław Dobija & Jurij Renkas, 2023. "Thermodynamic Approach to the Discount Rate and Discounted Cash Flow Method," Risks, MDPI, vol. 11(7), pages 1-12, June.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:7:p:118-:d:1182875
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    References listed on IDEAS

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