What is a good discount rate to use for NPV?
If shareholders expect a 12% return, that is the discount rate the company will use to calculate NPV.
If the firm pays 4% interest on its debt, then it may use that figure as the discount rate.
Typically the CFO’s office sets the rate..
What is the discount rate formula?
How to calculate discount rate. There are two primary discount rate formulas – the weighted average cost of capital (WACC) and adjusted present value (APV). The WACC discount formula is: WACC = E/V x Ce + D/V x Cd x (1-T), and the APV discount formula is: APV = NPV + PV of the impact of financing.
How do you use discount rate?
Discount Rate = T * [(Future Cash Flow / Present Value) 1/t*n – 1]Discount Rate = 2 * [($10,000 / $7,600) 1/2*4 – 1]Discount Rate = 6.98%
What is the difference between discount rate and interest rate?
The interest rate is the amount charged by a lender to a borrower for the use of assets. The lenders here are the banks and the borrowers are the individuals. Whereas, Discount Rate is the interest rate that the Federal Reserve Banks charges to the depository institutions and to commercial banks on its overnight loans.
What is an appropriate discount rate?
Discount Rates in Practice It can be thought of as the opportunity cost of making the investment. The opportunity cost, would be the cost related to the next best investment. … If we know that the cash-on-cash return for the next best investment (opportunity cost) is 8%, then we should use a discount rate of 8%.
Is it better to have a higher or lower discount rate?
A higher discount rate implies greater uncertainty, the lower the present value of our future cash flow. … The weighted average cost of capital is one of the better concrete methods and a great place to start, but even that won’t give you the perfect discount rate for every situation.