Discount rate for government projects: the case of government real estate in Estonia. Diskonteerimismäära leidmine riiklikele investeerimisprojektidele Eesti riigi kinnisvara näitel

Abstract

Government often faces decisions, which concern choosing between projects carrying different risk level and timing of cash flows. For calculating government real estate investment discount rate, we can apply social opportunity cost approach and derived from that the capital asset pricing model (CAPM). Several aspects have to be addressed when using CAPM: liquidity of assets, transaction costs and selection of appropriate comparative sector. Taking into account mentioned aspects, government discount rate for real estate investment in the long term investment horizon was found to be 8.9% according to CAPM. In case the lessee of real estate is government, then given discount rate overestimates payment risk level and actual discount rate should be between the price of loans taken by government and discount rate found using CAPM