Possible Sources of Disagreement Between Quantum Experts in Discount Rate Estimation
A Review of ICSID Awards
January 22, 2018
Possible Sources of Disagreement Between Quantum Experts in Discount Rate EstimationDownload Whitepaper
Quantum experts often rely on the Discounted Cash Flow (DCF) approach to assess losses. The DCF approach is one of the most widely-used and accepted valuation methods, thanks in large part to its flexibility and the fact that it can be tailored to accommodate a wide array of assumptions.
The DCF approach is a method to estimate the current value of a stream of future cash flows. It is predominantly used in cases where the claimant can demonstrate some sort of track record, suggesting that projections of cash flows are not purely speculative. Arbitration tribunals have indeed tended to require a track record of at least two years to provide a basis for the projections required for DCF calculations.
Even when the DCF approach is not the primary valuation method used by a quantum expert, it is often used as a method to provide some confirmation for results obtained with alternative valuation methods.
Making reasonable estimates of future cash flows requires the expert to support his/her projections of the revenues and costs for the period for which projections are made. Counsel also has to choose and support the date for which the assessment of loss is to be made. And, usually most disputed, the expert must determine the rate at which future cash flows are to be discounted to determine the net present value of the future cash flows.