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11.6 Discount Rate
Authors: B ManleyPublication: NZIF Forestry Handbook, Volume Section 11 – Forestry business and investment, pp 6, Dec 2023
Publisher: New Zealand Institute of Forestry
Abstract: The discount rate expresses the investor’s time preference for funds. It is a critical input to any discounted cashflow analysis because the net present value (NPV) calculated will invariably be very sensitive to the discount rate chosen. However, selecting the appropriate rate to use is problematical. The challenge is well summarised by Pearse (1990): "In principle, the appropriate rate of interest is the investor’s opportunity cost of capital; that is, the rate that he must pay to borrow or the rate he can earn on capital invested elsewhere at the margin. This rule applies to both governmental and private investors. But financial markets reveal a spectrum of interest rates, reflecting varying allowances for risk, expected inflation, distortions of the tax system, other market imperfections, and real returns to capital. Market rates also fluctuate continuously. It is difficult to identify from this information the opportunity cost of capital to apply to a specific investment and investor." UPDATE WARNING: Significant parts of the Forestry Handbook were produced in 2005. The NZ Institute of Forestry is currently reviewing the future strategy and role for the handbook. In the meantime, some subject areas have been removed as they no longer provide accurate information. Remaining subject areas provide some relevance and/or guidance but users must take cognisance of the fact that information is now dated and in many places does not now reflect the entirety of modern knowledge and technology being applied to the management of New Zealand’s forests.