Glossary
Discount rate
Definition
A discount rate is the rate used to convert future cash flows into present value, usually the return available on an investment of similar risk. The higher the rate, the less future money is worth today.
How discount rate works
In pension and lump-sum comparisons, the discount rate often decides the answer.
For businesses, it's tied to the cost of capital.
Why it matters to a firm
Documenting a reasonable discount rate supports defensible advice.
Questions about discount rate
Is it the same as an interest rate?
Similar, but it reflects the opportunity cost of money.
Why does it matter?
Small changes move present values a lot.
Should it include inflation?
Nominal rates for nominal cash flows.
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Related terms: Present value
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