Hello all,I am running a NPV on a salt dome gas storage unit. Although these facilities theoretically have a infinite life span, for conservative reasons I am placing a 40 year life on our valuation. I show a cash flow stream for 20 years and in year 20 I do a present value using a WACC of 7% as the discounting factor for another 20 years of cash flow.My question to you is, I was challenged by our VP of M&A that I should be using the IRR of the project to discount the terminal value (TV). I disagree with his thought and although I have found support in using WACC, I do not have a mathematical or a logical reason why we shouldnt use the IRR of the project. I feel he is trying to mix two different ideas (or calculations) into one but I haven't been very articulate as to how to defend my point. Does anyone have any ideas or methods that I can show as to why using the IRR to calculate TV is wrong.Latigo

using an IRR to calculate NPV results by definition in a NPV=0 since IRR is defined as the interest rate that solves for NPV=0 .... Can't help wondering how a VP in M&A became a VP...

Well, I mentioned that we had two options. We could use a perpetuity and use the WACC (which is 7%) but since this would give way too much value and all of us here know that no one else would use a WACC of 7% to value this storage...we decided to go with a present value calculation in year 20, for the next 20 years of cashflow.His thinking is, because in year 20 the IRR would be somethng like 14%, and he felt that we sicount the cash flows of year 20 -40 at the IRR.The norm of what I see, is TV should be discounted back on a resonable growth rate and cost of capital. But wanted to see if someone can come up with something more fancy so the VP doesn't continue to push back on this issue.

yeah. I guess one could wonder why you would make 14% perpetually on a project when your cost of capital is only 7%. Seems to good to be true...

I dont know that you can say that there is a relationship between WACC and IRR. Neither depend on each other and whether higher or lower, WACC will have zero impact on IRR. I could be wrong here but its just a thought.

other than that in a perfect economy (ha!) one would expect profit rates (IRR) and required returns (WACC) to be equal so that there are no excess profits possible ...