Implied Discount rate - NABE

Background• Discount rates reflect/measure the risk associated with an expected cashflow.• Cost sharing regulations, and in particular the income method, increasedthe focus of discount rates in transfer pricing.• The key question is how to identify and measure the appropriate discountto use with a given forecasted income. Important to understand:– the forecasts: do forecasts factor in the risk of failure, or reflect expected resultsif successful?– the forecast horizon: Financial results in the distant future are more uncertainthan those in the near future– the risk level of income to be discounted: Residual profits are more uncertainthan routine profits• Many concepts/formulas to measure discount rates, e.g. WACC, WARA,the IRR4