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What discount rate is most appropriate for net present value calculations of large-scale projects? Of small...

What discount rate is most appropriate for net present value calculations of large-scale projects? Of small projects? Of the quantity of inventories to hold?
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Answer #1

project leverage (debt structure) changes over time, which will change overall project risk. Hence the use of Single
Discount Rate for Large-Scale Project is inappropriate. Multiple discount rate (MDR) takes into consideration the change in the leverage of the project. The adjustment can be made if one can fairly estimate leverage risk which generally decreases as business goes overtime. Mandron [2000] advocated the use of MDR in large-scale project valuation which considers the changes in the capital structure of a project as well as the distribution of overall project risk in time. So, MDR is recommended over single discount rate.
For more detail kindly see

Mandron, A. “Improved Techniques for Valuing Large-Scale Projects: A Follow-Up.” The Journal of Structured Finance, Vol. 6, No. 1 (2000), pp. 33-45.

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