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Deterministic discounting of risky cash-flows

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  • Carlo Mari
  • Marcella Marra

Abstract

A model to value risky cash-flows through discounting at deterministic rates is presented. The analysis mainly concerns with the valuation of project’s levered cash-flows under default risky debt and general tax shield assumptions. Deterministic unlevered and levered rates as well as a deterministic Weighted Average Cost of Capital (dWACC) are defined and the relevant relationships among them are derived. The model allows to account for the risk of cash-flows in a proper way and produce exact results as in the stochastic discounting method. To illustrate the model, a numerical example about the evaluation of a two-period investment project with default risky debt is provided. The proposed approach is general and represents a first step toward a bridge between stochastic models for capital budgeting and more traditional capital budgeting techniques based on discounted cash-flow analysis.Mathematics Subject Classification: G31; G32; G33Keywords: Risky cash-flow; risky debt; tax shield; present value; WACC

Suggested Citation

  • Carlo Mari & Marcella Marra, 2017. "Deterministic discounting of risky cash-flows," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 6(3), pages 1-2.
    • Handle: RePEc:spt:fininv:v:6:y:2017:i:3:f:6_3_2
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    References listed on IDEAS

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