Dear Vince:

 I spent a little bit longer putting together my initial thoughts on
determining discount rates than I originally anticipated.  It is somewhat
surprising, but there really isn't much academic work that I am aware of
that addresses these issues.

Very briefly,

1. I think we need to come up with a way to define the concept of risk
capital simultaneously with the appropriate discount rate.

2. I think it is important to model Enron's opportunity cost of capital and
how that changes over time.  The liquidity of a project will affect its
value in a very significant way when the opportunity cost of capital
changes over time.  There is also likely to be a relation between duration
and discount rates that depends on the factors generating Enron's
opportunity cost of capital.

3. I have vague ideas about possible simulations that may help us quantify
some of the issues that I have raised.

Please take a look at the attached document.  You might find this somewhat
confusing, so I will give you a call later in the week to discuss this.

Please let me know when you will be free.  I look forward to hearing from you.

regards,

Sheridan

 
 - Determining discount rates for risky projects.doc

Sheridan Titman
Department of Finance
College of Business Administration
University of Texas
Austin, Texas 78712-1179

512-232-2787 (phone)
512-471-5073 (fax)

titman@mail.utexas.edu