Choosing the correct discount rate

The difference between an investors discount rate analysis and corp finance discount rates; How to choose a discount rate; How to apply the intricacies involved with calculating discount rates include matching the correct cash flow types,  We look at how to compute the right discount rate to use in a Discounted Cash Flow (DCF) analysis.

We believe using a discount rate in the 2% to 3% range may distort the city or county’s decision-making process. Recently, we’ve recommended economic development organizations use a discount rate of 4% to 5%. Ultimately, the discount rate should be evaluated regularly based on interest rate conditions and the city or county should feel comfortable with the rate. There is no hard and fast rule for choosing a discount rate. As we’ve discussed, there is a common range of discount rates, but the final choice is based on your expectations and narrative. If you choose to use a high discount rate such as 12% or 15% to discount the future cash, it just means you are willing to pay less today for the future cash. HOW TO SELECT THE RIGHT DISCOUNT RATE As shown in the analysis above, the net present value for the given cash flows at a discount rate of 10% is equal to $0. This means that with an initial investment of exactly $1,000,000, this series of cash flows will yield exactly 10%. In other words, they represent graphical evidence of how cash flows (earnings) based on a discount rate of 6.67% (P/E of 15) for most companies with earnings growth of 15% or less represent a proxy of fair valuation in real-world applications. This potential undervaluation despite a low discount rate reflects the use of pre-debt cash flow when debt is integral to the operations. The Company may be able to borrow at 9% but we are discounting that debt at 15% resulting in a six point spread that the client loses. Guidance on Setting Discount Rate There is no single correct discount rate for a set of future cash flows and no precise way to choose one. The appropriate discount rate for a particular investment depends not only on an investor’s preference for present over future consumption but also on his or her own risk profile, on the perceived risk of the investment under consideration, and on the returns available from alternative investments.

There are two issues here - first, the appropriate discount rate for each project based on the risk, and second the NPVs which result from using those discount rates. Mr. Hegde below makes good points about selecting the appropriate discount rate(s). Then the question becomes why note always select the highest NPV. In practice many reasons.

12 Sep 2011 Our clients often ask for guidance in choosing a discount rate for present Right now, 10-year municipal bond rates are about 2.06% to 2.37%  27 Sep 2013 Moreover, the next most critical input is in choosing the correct (best guess) discount rate to apply. Unfortunately, no precise values are  We believe using a discount rate in the 2% to 3% range may distort the city or county’s decision-making process. Recently, we’ve recommended economic development organizations use a discount rate of 4% to 5%. Ultimately, the discount rate should be evaluated regularly based on interest rate conditions and the city or county should feel comfortable with the rate. There is no hard and fast rule for choosing a discount rate. As we’ve discussed, there is a common range of discount rates, but the final choice is based on your expectations and narrative. If you choose to use a high discount rate such as 12% or 15% to discount the future cash, it just means you are willing to pay less today for the future cash. HOW TO SELECT THE RIGHT DISCOUNT RATE As shown in the analysis above, the net present value for the given cash flows at a discount rate of 10% is equal to $0. This means that with an initial investment of exactly $1,000,000, this series of cash flows will yield exactly 10%. In other words, they represent graphical evidence of how cash flows (earnings) based on a discount rate of 6.67% (P/E of 15) for most companies with earnings growth of 15% or less represent a proxy of fair valuation in real-world applications. This potential undervaluation despite a low discount rate reflects the use of pre-debt cash flow when debt is integral to the operations. The Company may be able to borrow at 9% but we are discounting that debt at 15% resulting in a six point spread that the client loses. Guidance on Setting Discount Rate

The discount rate is by how much you discount a cash flow in the future. For example, the value of $1000 one year from now discounted at 10% is $909.09. Discounted at 15% the value is $869.57. Paying $869.57 today for $1000 one year from now gives you a 15% return on your investment.

The discount rate is by how much you discount a cash flow in the future. For example, the value of $1000 one year from now discounted at 10% is $909.09. Discounted at 15% the value is $869.57. Paying $869.57 today for $1000 one year from now gives you a 15% return on your investment. Thanks for A2A David Kemper. You have already covered everything! Let me take a second stab at it: Explanation 1: Discount rate is basically "Desired return" or it is the return that an (individual) investor would expect to receive on a simila Determining the correct rate 1 1 At a glance 2 1.1ey facts K 2 1.2ey impacts K 3 2 Lessor discount rate 4 2.1ate implicit in the lease R 4 2.2ractical issues for lessors P 6 3 Lessee discount rates 9 3.1 Implicit vs incremental borrowing rate 9 3.2 Implicit rate – Lessee issues 11 3.3 Incremental borrowing rate 15

This potential undervaluation despite a low discount rate reflects the use of pre-debt cash flow when debt is integral to the operations. The Company may be able to borrow at 9% but we are discounting that debt at 15% resulting in a six point spread that the client loses. Guidance on Setting Discount Rate

12 Sep 2011 Our clients often ask for guidance in choosing a discount rate for present Right now, 10-year municipal bond rates are about 2.06% to 2.37%  27 Sep 2013 Moreover, the next most critical input is in choosing the correct (best guess) discount rate to apply. Unfortunately, no precise values are 

28 Mar 2012 2) People who use WACC claim that "you can't just pick any discount Given this , it is the correct discount rate to use when discounting the 

29 Jan 2020 The discount rate can refer to either the interest rate that the Federal Typically, an average of a select set of market rates of comparable What is the appropriate discount rate to use for an investment or a business project? The difference between an investors discount rate analysis and corp finance discount rates; How to choose a discount rate; How to apply the intricacies involved with calculating discount rates include matching the correct cash flow types,  We look at how to compute the right discount rate to use in a Discounted Cash Flow (DCF) analysis. Here goes. Discount Rate Basics. In commercial real estate, the discount rate is used in discounted cash flow analysis to compute a net present value. The 

We believe using a discount rate in the 2% to 3% range may distort the city or county’s decision-making process. Recently, we’ve recommended economic development organizations use a discount rate of 4% to 5%. Ultimately, the discount rate should be evaluated regularly based on interest rate conditions and the city or county should feel comfortable with the rate.