CAN YOU PLEASE EXPLAIN WHAT THE DISCOUNT RATE IS AND WHERE IT COMES - ProProfs Discuss
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Can you please explain what the discount rate is and where it comes from?



Asked by Marley, Last updated: Oct 15, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

As you have discovered, for the purposes of this course, you are provided with the discount rate. outside of this course, there are a few things to consider.the discount rate is essentially the interest rate used in discounting future cash flows. for example, if i told you that i would give you $100 at the end of the year, and you wanted to earn an annual rate of return of 7%, how much should you consider paying me in order to receive the future cash flow of $100? the answer: you would discount that future cash flow by the return rate you wish to receive. as such, you should consider paying me $93.46 ($100 / 1.07 = $93.46). at the beginning of the year you give me $93.46 and at the end of the year i give you $100. that leaves you with a rate of return of 7%.in the above example, you can see that you would have selected a discount rate based on the kind of return you wanted. there is another method for determining an appropriate discount rate: look in the globe and mail business section on monday and examine bonds with similar terms to maturity and coupon rates to see what their yields are. you can then base your discount rate on the yields you see in the media.so the above are two methods for determining the discount rate in your calculations. for the sake of ease, you are always provided with the discount rate in this course when being asked to carry out a calculation.
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