Determining a discount rate

rod

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How do you determine a discount rate when you are given a range of interest rates?

I need the rate to discount . The interest range is 4- 18 %. 4 % either understates and 11 % being a mid point may be an option. But what reasoning can there be?
Thanks
 

bklynboy

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Selecting a discount rate depends on several things including the time value of money, length of time, the risk of the project/cash flows and the company's WACC. It depends on what you are discounting.
 

rod

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The corporation has annual lease obligations for aircraft and premises. Minimum lease payments under these leases for each of the five
succeeding years and thereafter are as follows:
(thousands of dollars)
2013 $ 4,456
2014 4,022
2015 3,060
2016 3,280
2017 2,134
2018 and thereafter 3,759
Total $20,711


Condensed Statement of Financial Position
December 31, 2012
(thousands of dollars)
2012 2011
Assets
Current assets $ 26,135 $ 31,777
Land, buildings, and equipment 145,224 197,590
Goodwill 63,000 67,300
Intangible assets 114,832 81,230
$349,191 $377,897
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued liabilities $ 19,116 $ 22,615
Income tax payable 1,950 416
Current portion of long-term debt 11,600 24,599
Long-term debt
(interest rates ranging from 4% to 18%)

180,419 196,865
future income tax 11,276 15,788
Shareholders’ equity
Share capital 201,341 189,000
Contributed surplus 8,090 8,090
Deficit (84,601) (79,476)
$349,191 $377,897
 
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I typically use a discount rate similar to the company's incremental borrowing rate if they were to purchase the asset that is being leased.
 

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