In the context of Net Present Value (NPV), the discount rate is the rate used to adjust future cash flows to their present value. In simple terms, it reflects how much less money in the future is worth compared to money today.
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✨ Think of it this way
Would you rather have $100 today or $100 a year from now?
Most people would say today, because:
- You could invest it and earn interest
- There’s uncertainty about the future
- Inflation reduces buying power over time
The discount rate helps account for that time difference — it’s the cost of waiting for money.
💼 In finance, the discount rate often represents
- Your expected rate of return
- The interest rate on borrowed money
- The minimum acceptable rate for an investment to be worth it
- Or a company’s cost of capital
🧮 Example
If you expect to earn 10% per year elsewhere (like in a safe investment), you might use 10% as your discount rate when analyzing a project. That means:
“Any project I invest in should at least return 10% per year to be worthwhile.”
So, the higher the discount rate, the less valuable future cash flows become — and the harder it is for a project to have a positive NPV.
Try the NPV Calculator to see the impact of discount rate.
💰 NPV Calculator with Chart
⚙️ How to use the Calculator
Imagine this situation:
- You invest $1,000 now
- You expect to receive $300 in Year 1, $400 in Year 2, and $500 in Year 3
- You use a discount rate of 10%
In the calculator, you enter:
C0 = 1000r = 10C1 = 300,C2 = 400,C3 = 500
