Saturday, May 17

Discount Rate

The Discount Rate is a general term referring to any rate that is used in finding the present value of a future cash flow. it reflects the return or compensation required by an investor for
a) delaying consumption (represented by the risk free rate) and
b) assuming risk of cash flow

Different discount rates may be used for different expected future cash flows. This is possible due to varying rates of inflation and other factors that may affect the future cash flows. However, for simplicity, generally a single discount rate (required rate of return) is used in most cases to discount future cash flows to appear at the present value of future cash flows.

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