Risk Adjusted Discount Rate - Revision history

Dirkjan at 19:25, 27 August 2020

2020-08-27T19:25:51Z

Dirkjan: Replaced content with "Risk Adjusted Discount Rate Category:finance Category:Entrepreneurial Finance Category:M13 Category:Term"

2020-08-27T18:39:28Z

Replaced content with "Risk Adjusted Discount Rate Category:finance Category:Entrepreneurial Finance Category:M13 Category:Term"

Dirkjan: Created page with "In Entrepreneurial Finance the Risk Adjusted Discount Rate or RADR is defined as a common method of estimating Present Value. The..."

2020-08-25T07:41:22Z

Created page with "In Entrepreneurial Finance the Risk Adjusted Discount Rate or RADR is defined as a common method of estimating Present Value. The..."

New page

In [[Entrepreneurial Finance|Entrepreneurial Finance]] the Risk Adjusted Discount Rate or RADR is defined as a common method of estimating [[Present Value|Present Value]]. The second common method is called the [[Certainty Equivalent Cash Flow|Certainty Equivalent Cash Flow]] method. In the RADR method an expected future cash flow is convert to [[Present Value|Present Value]] by applying a discount rate that represents both:
* The [[Time value of money|Time value of money]]
* The '''''riskiness''''' of the future cash flow

For a particular project <math>j</math>, that yields and uncertain cash flow at time <math>t</math> the appropriate discount rate for valuing the expected cash flow can be stated as follows:

<math>r_{jt}</math> <math>=</math> <math>r_{Ft} + RP_{jt}</math>

Where:
<math>r_{Ft}</math> is the required rate of return (or cost of capital, see [[WACC|WACC]]) and
<math>RP{jt}</math> is the risk adjustment to the discount rate.

In simple terms this can be interpreted that the future cash flows are discounted faster because there is a non-neglect able risk that the future return is lower or higher than currently expected.

The present value by the risk adjusted discount rate method is given as:
<math>{PV_j} = \sum_t{\frac{C_jt}{(1+r_t)^t}}</math>
[[Category:finance]]

[[Category:Entrepreneurial Finance]]

[[Category:M13]]

[[Category:Term]]

← Older revision		Revision as of 18:39, 27 August 2020
Line 1:		Line 1:
−	~~In [[Entrepreneurial Finance\|Entrepreneurial Finance]] the~~ Risk Adjusted Discount Rate or RADR is defined as a common method of estimating [[Present Value\|Present Value]]. The second common method is called the [[Certainty Equivalent Cash Flow\|Certainty Equivalent Cash Flow]] method. In the RADR method an expected future cash flow is convert to [[Present Value\|Present Value]] by applying a discount rate that represents both:	+	Risk Adjusted Discount Rate
−	* The [[Time value of money\|Time value of money]]
−	* The '''''riskiness''''' of the future cash flow
−
−	~~For a particular project <math>j</math>, that yields and uncertain cash flow at time <math>t</math> the appropriate discount rate for valuing the expected cash flow can be stated as follows:~~
−
−	~~<math>r_{jt}</math> <math>=</math> <math>r_{Ft} + RP_{jt}</math>~~
−
−	~~Where:~~
−	~~<math>r_{Ft}</math> is the required rate of return (or cost of capital, see [[WACC\|WACC]]) and~~
−	~~<math>RP{jt}</math> is the risk adjustment to the discount rate.~~
−
−	~~In simple terms this can be interpreted that the future cash flows are discounted faster because there is a non-neglect able risk that the future return is lower or higher than currently expected.~~
−
−	~~The present value by the risk adjusted discount rate method is given as:~~
−	~~<math>{PV_j} = \sum_t{\frac{C_jt}{(1+r_t)^t}}</math>~~
	[[Category:finance]]		[[Category:finance]]

← Older revision		Revision as of 19:25, 27 August 2020
Line 1:		Line 1:
−	Risk Adjusted Discount Rate	+	In [[Entrepreneurial Finance\|Entrepreneurial Finance]] the Risk Adjusted Discount Rate or RADR is defined as a common method of estimating [[Present Value\|Present Value]]. The second common method is called the [[Certainty Equivalent Cash Flow\|Certainty Equivalent Cash Flow]] method. In the RADR method an expected future cash flow is convert to [[Present Value\|Present Value]] by applying a discount rate that represents both:
		+	* The [[Time value of money\|Time value of money]]
		+	* The '''''riskiness''''' of the future cash flow
		+
		+	For a particular project <math>j</math>, that yields and uncertain cash flow at time <math>t</math> the appropriate discount rate for valuing the expected cash flow can be stated as follows:
		+
		+	<math>r_{jt}</math> <math>=</math> <math>r_{Ft} + RP_{jt}</math>
		+
		+	Where:
		+	<math>r_{Ft}</math> is the required rate of return (or cost of capital, see [[WACC\|WACC]]) and
		+	<math>RP{jt}</math> is the risk adjustment to the discount rate.
		+
		+	In simple terms this can be interpreted that the future cash flows are discounted faster because there is a non-neglect able risk that the future return is lower or higher than currently expected.
		+
		+	The present value by the risk adjusted discount rate method is given as:
		+	<math>{PV_j} = \sum_t{\frac{C_jt}{(1+r_t)^t}}</math>
	[[Category:finance]]		[[Category:finance]]