Discount Rate

Posted in Finance, Accounting and Economics Terms, Total Reads: 1031
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Definition: Discount Rate

Discount rate means the interest rate charged when taking any loan / borrowing. Each corresponding type of credit has its own discount rate. Discount rate is also the factor with which one discounts the future cash flows in order to find its present value. Discount rate is generally the prevailing cost of capital. For a project / company valuation, the discount rate used is weighted average cost of capital taking into account the weights & the costs of debt and equity used to finance the project / company.


It is generally expressed in annual terms.


Calculation of discount rate could be subjective depending upon the risk aversion of the investors.

 

For e.g. if the current rate of interest is 10% and one is expected to receive $1000 in one year, the present value of such a future cash flow is only $909. Thus the discount rate in this case is the rate of interest i.e.10%


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