The management of any petroleum company is charged with allocating resources among potential investment opportunities. Determination of the appropriate discount rate is a critical element in the analysis of these opportunities using discounted cash flow techniques. The appropriate discount rate is affected by a number of factors, some a matter of macroeconomic conditions (e.g., inflation and interest rates), some a matter of company policy (capital structure), and some specific to the particular project. This paper discusses (1) the general methodology for estimating company-average discount rates, reflecting both macroeconomic factors and company policy choices, and (2) the circumstances under which the company-average rate is likely to be significantly inappropriate and the adjustments that can be made under those circumstances.

You can access this article if you purchase or spend a download.