What is a ‘Discount Rate’?
The term discount rate is often used to refer to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.
The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate.
What is the appropriate discount rate to use for a project? Many companies use their weighted average cost of capital (WACC) if the project’s risk profile is similar to that of the company.