When sophisticated mineral buyers invest in the purchase of mineral acreage they expect to earn a rate of return. You might think of the difference between your Royalty Forecast and the Present Value as the minimum return on investment an investor expects to make. The Present Value is what the investor is willing to pay TODAY for your future, expected royalties. The percentage used to reduce, or, ‘discount’ those future earnings is called the discount rate. Individual investors set their discount rate to suit their needs and expectations about the riskiness of the investment as well as their own cost of capital. It’s common in the industry for investors to be discounting anywhere from 8 to 15%, but these values change from deal to deal. As a ShaleCast user you can adjust the discount rate to suit your expectations.
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