One Project, Two Discount Rates

BVResearch Pro
American Society of Appraisers Business Valuation Review™
Spring 2001 Volume 20, Issue 1 pp. 18-23
Graham A. Davis


Traditional finance theory recommends discounted cash flow analysis as the tool to value mineral properties, yet the calculated values are usually lower than the market value. Finance theory also advises us to develop an undeveloped project immediately if its net present value is positive. Most projects are, however, only developed when the economics are highly favorable. This paper uses insights from option pricing theory to explain these divergences between market behavior and finance theory, and presents simple modifications to discounted cash flow analyses that will lead them to produce correct valuation and development timing advice.
One Project, Two Discount Rates
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