Project valuation when there are two cashflow streams

Some authors advocate the separate discounting of different cashflows when calculating net present value (NPV). However, some textbooks (Principles of Corporate Finance, Financial Theory and Corporate Policy: 3rd ed.) focus on calculating NPV by discounting the expected net after tax cashflow using the weighted average cost of capital (WACC) as the discount rate. We show that discounting the expected net after tax cashflow of a project using the WACC yields an incorrect project NPV. A new method for calculating project NPV's using a separate cashflow discounting method is proposed and applied to calculating the NPV's of some North Sea oil projects. (C) 2002 Elsevier Science B.V. All rights reserved.