How To Determine The Discount Rate

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How To Determine The Discount Rate
How To Determine The Discount Rate

Video: How To Determine The Discount Rate

Video: Discount rate basics 2022, December
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The discount rate is the level of return that an investor wants to have when investing money. With its help, you can determine how much you need to pay today in order to receive the required amount in the future.

How to determine the discount rate
How to determine the discount rate

Necessary

  • - calculator;
  • - knowledge of financial analysis.

Instructions

Step 1

The discount rate is applied when assessing the effectiveness of investments. Making key decisions when choosing an investment project directly depends on the selected value of this indicator.

Step 2

For different calculation steps, different values ​​of the casting rate can be chosen. This is acceptable in cases of changing risk dynamics, the amount of borrowed funds, and the capital structure.

Step 3

The influence of a large number of factors makes it difficult to offer a universal method for selecting an indicator. In any case, it should reflect the return on investment, adjusted for inflation, alternative and risk-free investment directions available to the investor.

Step 4

From a technical point of view, the discount rate can be defined as the interest rate, the basis for determining the market value of a business. The calculation depends on what type of cash flow is used as the basis for the valuation.

Step 5

When calculating, the following can be used: inflation rates, weighted average cost of capital, expert judgment, refinancing rate, profitability of an alternative project, bank interest rate on loans or deposits.

Step 6

Most often, capital is raised from several sources. In this case, the weighted average cost of capital is used. It is calculated by the formula: WACC = ∑_ (i = 1) ^ n▒ 〖Di × Ei〗 n = the number of types of capital; E = the rate of discount of the i-th capital; Di = the share of the i-th capital in the total amount of capital.

Step 7

It is very important to most accurately determine the discount rate for a given direction of investment. This directly affects the amount of income that will be obtained as a result of investment.

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