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mid-2008, investment capital for mining projects has been a scarce resource as mining companies have to compete with projects from other sectors (Njowa et al., 2013) while markets remain depressed. It is imperative that valuation of mining projects is treated with caution as decisions to invest in mineral projects are based on the expected return derived from valuations. The discounted cash flow (DCF) analysis is commonly accepted as the principal method for valuing mining projects (Park and Matunhire, 2011; Smith et al., 2007; Janisch, 1976). In DCF analysis, an appropriate discount rate is applied to discount future cash flows to present value. The discount rate is important because it significantly impacts the outcome of a valuation. Economic and finance theory provides valuable tools to calculate discount rates. However, there is often uncertainty on an appropriate discount rate to apply to a project, as the discount rate must account for such factors as the risk and stage of development of the mineral project. The Weighted Average Cost of Capital (WACC) is the discount rate that is used for cash flows with risk profiles similar to that of the overall company. The WACC is the average after-tax cost of capital, which is computed as the weighted sum of the cost of debt and equity. The cost of debt is derived from the interest rate adjusted for the tax rate, normally fixed for the length of the loan. The cost of equity can be calculated using the commonly applied Capital Asset Pricing Model (CAPM) or Gordon’s Wealth Growth Model, even though there are other less commonly used methods such as the Arbitrage Pricing Theory (APT). The cost of equity is defined as the expected return on an asset’s common stock in capital markets (Witmer and Zorn, 2007). There is a risk that the investor may not receive the expected return; therefore, investors are expected to take the risk of the investment into account when determining the returns they want to receive. There is a relationship between risk and expected return on a stock; the greater the risk, the greater the expected return on investment the investor expects (Fehr, 2010). It is vital, then, that a proper analysis of a stock is done in order to determine its true value and forecast future returns. According to Witmer and Zorn (2007), estimating the cost of equity is not a straightforward exercise; different assumptions and methods result in Estimating cost of equity in project discount rates: comparison of the Capital Asset Pricing Model and Gordon’s Wealth Growth Model

Estimating cost of equity in project discount rates: comparison of the Capital Asset Pricing Model and Gordon's Wealth Growth Model