Build a Discount Rate Scenario Model

This guide shows how to analyse valuation sensitivity to different discount rates in Model Reef by using multiple models as scenarios.

Remember: in Model Reef each scenario is a separate model. There is no internal scenario state in a single model.

Before you start

You should have:

• A base valuation already configured using FCFF and FCFE.

• Reasonable default values for:

  • WACC.

  • Equity discount rate.

  • Terminal value.

What you will build

• A set of models that differ only in discount rate assumptions.

• A comparison of NPVs, IRRs and Money Multiples across discount rate scenarios.

• Optional dashboards that show valuation versus discount rate.

1

Choose discount rate scenarios

Decide which discount rates you want to test. For example:

• Low rate case (for example WACC 8 percent).

• Base case (for example WACC 10 percent).

• High risk case (for example WACC 12 percent).

You may also vary the equity discount rate separately.

2

Duplicate the base model for each scenario

• Starting from your base model:

  • Create a copy named for each scenario, for example:

    • Model - Valuation - Low Rate

    • Model - Valuation - Base

    • Model - Valuation - High Rate

• Confirm that all underlying variables and forecasts are identical initially.

Each copy is now an independent model with its own valuation settings.

3

Set discount rates per scenario

In each scenario model:

• Open Valuation settings.

• Adjust:

  • WACC to the target rate for that scenario.

  • Equity discount rate if you want to test equity sensitivity separately.

• Leave all other assumptions (cashflows, terminal value method and growth) unchanged.

This isolates the effect of discount rates.

4

Record results for each scenario

For each scenario model:

• Note the key outputs:

  • Project NPV (FCFF based).

  • Equity NPV (FCFE based).

  • Project IRR and Equity IRR.

  • Money Multiple and Payback.

• Capture these results in:

  • A separate summary dashboard, or

  • An external comparison sheet if you prefer to tabulate.

5

Build a discount rate comparison dashboard (optional)

In a separate model or documentation space:

• Create a small table or chart listing:

  • Scenario name.

  • WACC.

  • Equity discount rate.

  • Project NPV.

  • Equity NPV.

  • Project IRR.

  • Equity IRR.

• Use this to visualise:

  • How valuation declines as discount rate increases.

  • Where the business remains attractive on an NPV or IRR basis.

Although scenarios are separate models, your dashboard or external summary acts as the comparison layer.

6

Interpret the results

Ask questions such as:

• At what discount rate does NPV fall to zero.

• What band of discount rates still yields attractive equity IRR.

• How much risk premium is priced into the valuation.

Use these insights for negotiation, risk assessment and communication with stakeholders.

Check your work

• All scenario models share the same underlying cashflows.

• Only discount rate and possibly terminal assumptions differ.

• Recorded NPVs and IRRs are consistent with those settings.

• The relationship between discount rate and value is monotonic and intuitive.

Troubleshooting

Unexpected non monotonic NPV behaviour

Check that you did not accidentally change other assumptions in one of the models. Discount rate only scenarios should show a smooth relationship between rate and value.

Equity IRR does not change much with discount rate

Equity IRR depends on the pattern of equity cashflows and purchase price, not directly on the discount rate. This can be normal. Focus on Equity NPV as the discount rate sensitive measure.

Related guides

• Long-Horizon Scenario Planning

• Mapping Branches

• Mapping Categories

• Selecting Variables in Sidebar