Question

As a project manager in an engineering company, what consideration would you make in deciding the discount rate to use for different projects?

Answer 1

The Discount rate is affected by many factors while choosing different projects because it project is different from other. so while choosing discount rate we must consider the following points:

Different rates for different products: As we know every product have its own characterstics and all products have their own costs their own life period and factors that affect that product. so, Different products must have different discount rates. Some products which are more precious must have more discount rates while products with less value may have a little less discount rate.

Jurisdication Of the project: The place or the country in which it will be started must also be considered their jurisdication must be considered as different countries have different jurisdication policy. Some countries have a more stable jurisdication while some have a little fluctuating. so, if the country in which the jurisdiation is stable can have a less discount rate then the country having more fluctuating jurisdication.

Size and experience of the project owner: If the owner is a major personality or is known with credible experience in operations no additional discount must be added or we can say the discount rate can be lower but if the owner of the project is not known or have a bad reputation in the market then the extra discount rate must be added or the discount rate must be high.

Precise Information : When precise information pretaining to access and the processing method to be used are lacking , or when the enviornmental sensitivities and permitting requirements are uncertain, higher discount rates should be applied and if, the information access is permissable and enviornmental sensitivities are certain then the discount rates should be lower.

Rate of return: Rate of return is a crucial point to be considered while determining the discount rate. The rate of retuen expected from the different projects are different and also the expectations of the owner is also different so while deciding the discount rate ROR is also an important factor that needs to be considered. that project will only be choosed whose rate of retuen is high.