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Discount Rate

Definition

The return used to convert future cash flows into present value.

How It Works

Higher discount rates reduce present value because future dollars are worth less today. The discount rate reflects opportunity cost and risk.

Formula

PV = FV/(1+r)^n

Example

At 5% the PV of $100 in 1 year is $95.24; at 10% it is $90.91.

Common Misconceptions

✗It is always the same as inflation
✗A higher rate increases PV

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FAQs

Common questions about Discount Rate

Usually from WACC, required return, or a stated hurdle rate.

Not always. The interest rate is what you earn on savings or pay on debt. The discount rate is the required return used to value future cash flows, which may include a risk premium beyond the risk-free interest rate.