What is Discount Rate? | Learn with Finance Strategists | Under 3 Minutes

hi i'm rainey with finance strategist in this lesson we're going to cover [Music] discount rate is the rate of return used to discount future cash flows when calculating an investment's present value a discount rate is applied to future cash flows because money earned in the future is less valuable than money earned today this is based on the principle that money should make more money over time a concept known as the time value of money the discount rate is often used when computing a company's weighted average cost of capital or wacc and is used as a required rate of return or the hurdle rate that companies and investors expect as a return on their investment companies will have different discount rates since they will have different expectations for what return their investments should make for the company in general newer companies that are growing will have a higher internal rate of return and therefore use a higher discount rate when discounting future cash flows a company's discount rate is used to calculate the net present value of an investment the net present value or npv of an investment is what the value of future cash flows is worth today if an investment's net present value is a positive number then it is considered a wise investment since the returns were greater than the investors or company's required rate of return another name for discount rate discount dave considers investing six thousand dollars in a new machine that will generate one thousand dollars a year for its useful lifetime of seven years without factoring in a discount rate it seems that discount dave's investment is profitable since seven thousand dollars is greater than six thousand dollars however when he applies the 10 discount rate to his future cash flows the present value of future cash flows is only four thousand six hundred ninety five dollars after subtracting his original investment of six thousand dollars his investment's net present value is negative one thousand three hundred five dollars since his investment would lead to a loss after factoring in the discount rate discount dave looks for a better investment let's hear from you how do you think companies determine which discount rate they should use to discount future cash flows leave a comment below for more information visit www.financestrategist.com finance strategist strategies for you

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