Implied Discount rate - NABE

The “Implied Discount rate”: in practice• In practice, for a majority of cases it may be extremely difficult to observe directmarket evidence of the “implied discount rate”• An alternative is to derive the discount rate of the non-routine profit stream of thecost shared intangibles from the overall return.• Consider the equality: Operating profit = routine return + non-routine profit• Expressing in present value terms:NPV(Operating profit, R OI ) = NPV(routine return, R R ) + NPV(non-routine return, R NR )where,R OI = discount rate for operating profit (e.g., WACC)R R = discount rate for routine returnR NR = discount rate for non-routine profit• One approach to derive the discount rate of routine return may be to use the WACCsof routine comparables.• Re-arranging terms:NPV(non-routine return, R NR ) = NPV(Operating profit, R OI ) - NPV(routine return, R R )• Thus, implied discount rate for the non-routine profit stream may be derived as ratethat solves the above equality (through iteration)• It is still prudent to perform a sanity check to determine that the derived discount rateis reasonable given market evidence15