Slow, Inflexible, and Micromanaged: The Problems of a Military that Overstates Risk
Ben Summers | May 9, 2017
A few weeks ago in my corporate finance class at West Point, I hosted a guest speaker from a Cambodian private equity firm. The lesson focused on valuations and risk. Riskiness in finance relates to the uncertainty of a prediction, and it’s measured with a discount rate. The higher the rate, the riskier the estimate and the less value it would have relative to one with less risk. We analyzed an opportunity to invest in a Cambodian mango plantation. We were shocked when the guest shared that the standard discount rate used for these types of “frontier” investments in Cambodia was 35 percent. To put this into context, analysts predict that Tesla’s discount rate should be about 12 percent. The guest’s comments got us thinking. What are the implications when we have really high discount rates?
When you assume a high level of risk for a project, early cash flows are especially important. You’ll lean towards projects that generate cash quickly. The short term really matters.
https://mwi.usma.edu/slow-inflexible-micromanaged-problems-military-overstates-risk/
