Discount rate
The interest rate used in calculating discounted cash flows (DCFs). For decision making purposes, two or more different DCF streams may be calculated, each using a different interest rates. When choosing interest rates for analyses, be sure to find out if the organization has established an policy or preferences for choosing DCF discount rates.
One approach is to calculate two different DCFs, using a higher rate for one and a lower rate for the other. As the lower interest rate, one may use the the current cost of capital or current return rate on high quality bonds. A DCF based on this rate represents essentially the contribution of opportunity cost to the present cash flow. As a second interest rate, one can simply double the first rate. DCFs based on this higher rate provide some measure of time-based risk: the assumption is that near-term cash inflows or outflows are more certain than those in the distant future, and should therefore be given more weight.
Note that in the US, the term discount rate also refers to the rate the Federal Reserve charges member banks for loans.
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