Chapter 8: More On Discounting Available to Purchase

In this chapter I’m going to carry on the conversation we started in Chapter 6 (Introducing Discounting). Chapter 6 was about how companies raise the capital they need from lenders and investors to invest in their businesses and how much that capital costs them. It went on to examine how that cost, despite being a relevant cash flow, doesn’t feature in petroleum economists’ evaluations of new opportunities in the same way that other relevant cash flows do, however, because it isn’t dictated by individual projects and is managed at the level of the company as a whole.

Instead, that cost features in a procedure called “discounting,” which strips out of a project’s forecast of its net cash flows the contribution it will have to make over its lifetime to the company’s cost of capital.