Discount Rate Modifiers
This article explains how discount rates and discount rate modifiers work in Model Reef.
You will learn:
How WACC and equity discount rates are used.
How discount rates interact with model periodicity.
How to adjust discount rates by scenario or risk factor.
Discount rates translate future cashflows into present values and have a strong effect on NPV.
Core discount rates
Model Reef uses two primary discount rates:
WACC (Weighted Average Cost of Capital)
Used to discount FCFF.
Appropriate when valuing enterprise value.
Equity discount rate
Used to discount FCFE.
Appropriate when valuing equity directly.
You set these in the valuation settings for each model or scenario.
Periodicity and discount factors
Discounting respects the model's time structure.
Rules:
If the model is monthly, annual discount rates are converted to effective monthly rates.
If the model is quarterly or yearly, discount factors are adjusted accordingly.
If cashflows are irregular in time, date based discounting matches Excel XNPV style behaviour.
This keeps present value calculations consistent with the underlying period structure.
Discount rate modifiers
You can use modifiers to adjust discount rates for:
Scenario specific risk premiums.
Country or currency risk when modelling multiple regions manually.
Project risk relative to the core business.
Different investor required returns.
Typical patterns include:
Starting from a base WACC or equity rate.
Adding or subtracting a percentage for specific risk factors.
Using different rates for separate valuation blocks or sensitivities.
Modifiers are usually implemented using driver or assumption variables that feed into the valuation settings.
Using discount rates in scenarios and sensitivity analysis
In practice you will often:
Set a base discount rate in a central assumption library.
Override it in specific scenarios to represent higher or lower risk.
Run sensitivity cases where the discount rate varies by a few percentage points.
Model Reef then recomputes NPV, IRR and money multiple for each scenario using its discount rate configuration, allowing you to compare risk adjusted valuations.
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