Choosing the cash flow discount rates
By default, the estimated cash flows of the Projects are discounted to a rate depending on the type of Project:
| Project type | Discount rate |
|---|---|
SOFR + 7.5% | |
SOFR + 6.0% |
This choice has a direct impact on how the Protocol behaves:
If the discount rate is higher, the more demanding the Protocol will be with respect to the expected profits of the Projects. The higher the discount rate is, the lower the asset values will be.
If the value of the assets is lower, the depreciation amount to compensate every month will reduce; and a bigger portion of the monthly income could be used for funding new Projects. However, at the same time the difference between the origination price of the assets and the Project valuation will narrow. If this is the case, this will discourage investors to buy pWatts and provide external liquidity to the Reserve, because the rewards will not be worth the origination risk.
The given values are conservative and allow to keep a good balance between origination rewards and depreciation amounts. However, depending on the particularities of every Project, the discount rate may vary, specially depending on the risk assessment of the Project.
The higher the risk of the Project, the expected profits for that Project would have to be higher to compensate for this risk.
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