Hi,

I want to make some fixed investments but have different options at the moment. I need to estimate and compare the equivalent value of my total equity at maturity with the present value of my capital in order to decide which investment to make and to have a safe figure to re-invest inorder to have a sustainable equity growth.The investment is in Nigeria and I would like to have an effective discount rate to use.

What single effective discount rate could I use in the text book equations for time-value of money that combines the effect of inflation, GDP, currency depreciation rate and other macroeconomic factors that may quantitatively influence it?

Gurus in the house please help your boy.
Pls tag as many gurus as possible that could help.

Thanks.

Cc: MrKnowitall, dominique, Seun, Lalasticlala

Inflation
Opportunity cost
Borrowing costs

You may have to define your own cost of capital/discount rate using one or a combination of the above. Inflation could be your floor while opportunity cost or borrowing costs could be your cap (whichever is higher). If you have a business that earns you RoI of say 25%, you should discount using that rate because that's the forgone return.

Also, you could just define IRR if you can reliably estimate the cashflows from the investment

At the end of the day it's up to you to determine your own discount rate as your needs are peculiar to you.

olujaidi:
Inflation
Opportunity cost
Borrowing costs

You may have to define your own cost of capital/discount rate using one or a combination of the above. Inflation could be your floor while opportunity cost or borrowing costs could be your cap (whichever is higher). If you have a business that earns you RoI of say 25%, you should discount using that rate because that's the forgone return.

Also, you could just define IRR if you can reliably estimate the cashflows from the investment

At the end of the day it's up to you to determine your own discount rate as your needs are peculiar to you.

I might be unable to use the IRR approach now because it would require alot of data but it seems to me like a more efficient approach. I just need a quick figure to plot into a simple Mixed Integer Linear Programming optimization model to eliminate some decision options or at least reduce my degrees of freedom. For now, I will use a discount value somewhere from 80-100% along inflation and borrowing/opportunity costs - whichever is higher.

This has solved my problems for now. Thank you so much.

DanXplore:


I might be unable to use the IRR approach now because it would require alot of data but it seems to me like a more efficient approach. I just need a quick figure to plot into a simple Mixed Integer Linear Programming optimization model to eliminate some decision options or at least reduce my degrees of freedom. For now, I will use a discount value somewhere from 80-100% along inflation and borrowing/opportunity costs - whichever is higher.

This has solved my problems for now. Thank you so much.

Ah...na simple goal seek for MsExcel I dey use for IRR o!

Also, you can simply use your desired return as your discount factor. Using 80-100% is quite steep. Maybe to see the worst case scenario. In that case, you could have 3 scenarios- Best, Realistic and Worst case.

Since you're mathematically inclined, perhaps you can create an equation for yours where the minimum value is inflation or risk free rate, with other add-ons for risk and returns

olujaidi:


Ah...na simple goal seek for MsExcel I dey use for IRR o!

Also, you can simply use your desired return as your discount factor. Using 80-100% is quite steep. Maybe to see the worst case scenario. In that case, you could have 3 scenarios- Best, Realistic and Worst case.

Since you're mathematically inclined, perhaps you can create an equation for yours where the minimum value is inflation or risk free rate, with other add-ons for risk and returns

Thank you very much