Project Valuation when There are Two Cashflow Streams

Some authors (Lewellen, 1977, Shall, 1972, Butters et al., 1987, Laughton and Jacoby, 1993, Jacoby and Laughton, 1992, Salahor, 1998) advocate the separate discounting of different cashflows when calculating net present value (NPV). However, some textbooks (Brealy and Myers, 1991, Copeland and Weston, 1992) focus on calculating NPV by discounting the expected net after tax cashflow using the weighted average cost of capital (WACC) as the discount rate. We show that discounting the expected net after tax cashflow of a project using the WACC yields an incorrect project NPV. A new method for calculating project NPV’s using a separate cashflow discounting method is proposed and applied to calculating the NPV’s of some North Sea oil projects. Key Words: Separate discounting, CAPM, oil projects JEL Classificication: Q4, G12, G31 Acknowledgements This paper contains a revised version of some material from the PhD thesis, Emhjellen (1999), which was supervised by the second author. The data were obtained when Emhjellen was employed by Statoil for use in his PhD thesis.