Improved Techniques for Valuing Large-Scale Projects

The purpose of this article is threefold. First, it reinforces an argument made by Benjamin Esty in the Spring 1999 issue of the Journal of Project Finance that variable discount rates should be used for valuation of projects because both leverage and business risk change over the course of the project. Second, the author argues for discounting equity cash flow at the cost of equity rather than discounting free cash flow at the weighted-average cost of capital. Third, she disputes the traditional wisdom that leverage should be measured in market value terms and offers simpler-to-compute notional book debt ratios as an alternative.