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The Resource for the Global Finance Profession

2013 AFP Estimating and Applying
Cost of Capital Survey

2013 Cost of Capital Cover thumbnail
Small fluctuations in cost of capital create huge swings in discounted cash flow figures that impact strategic decisions about future capital investments and acquisitions. That is why an understanding of trends and best practices in estimating/applying cost of capital has become more critical to the financial planning & analysis (FP&A) function today.

 To provide FP&A and other financial professionals with information about current trends in project and investment valuation and estimating the cost of capital, the Research Department of AFP conducted a survey in July 2013 to update findings of its 2010 landmark report on estimating and applying the cost of capital. More than 400 financial professionals representing a wide profile of organizations responded to the survey. The data presented in this report highlight the contours of typical project evaluation for finance departments. 

The overwhelming majority of project and investment valuation is done using discounted cash flow (DCF). Eighty-five percent of organizations use DCF techniques to evaluate projects and investments. Slightly more than half of organizations that use DCF techniques to evaluate projects and investment opportunities (51 percent) are most likely to discount explicit forecasted cash flows over the first five years of a project, after which they discount a calculated terminal or continuing value of the project. Fifteen percent of financial profession­als report their organizations use the value driver model to estimate the terminal or continuing value of a project or investment opportunity. Most organizations (72 percent) continue to consider a number of scenarios-such as "best case," "expected case" and "worst case"-when modeling cash flow for a project or investment opportunity.

Technique Used for Project and Investment chart

Typical Length of Cash Flow chart

Download the Report and Survey Highlights

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