Incorporate finance; the discount rate is the rate that can reduce future cash flows to their present value. This rate is often the Weighted Average Cost of Capital (WACC) of a company, the quality of return required, or the hurdle rate investors expect to earn relative to the investment risk.
The discount rate should thus equate to the level of return currently yielded by similar stabilized investments. Should use a discount rate of 8 percent if we know that our cash-on-cash return on the next best investment (opportunity costs) is 8%.
In discounted cash flow analysis, the same word, the discount rate, is used. DCF is a standard method of assessment used to measure an investment’s value based on its projected future cash flows. The DCF analysis helps determine an asset or project’s feasibility by measuring the current value of potential future cash flows using a discount rate based on the principle of the time value of capital.
Simply speaking, if a project now (as well as in the months to come) needs a particular investment, and projections of its future returns are available, then the present value of all these cash flows can be measured using the discount rate.