Glossary

The discount rate is the interest rate used to determine the present value of future cash flows in financial analysis. 📉

It's used to "discount" future cash flows back to their current value, helping investors evaluate the attractiveness of an investment or project. In a broader context, the discount rate can also refer to the interest rate that central banks charge commercial banks for short-term loans.

For example, if a project promises to generate $1,000 in one year, and the discount rate is 10%, the present value of that cash flow would be $909.09 ($1,000 / (1+0.10)).

Fun fact: The selection of an appropriate discount rate is a critical aspect of financial analysis. 🤔 A higher discount rate will result in a lower present value for future cash flows, which can make an investment appear less attractive. Conversely, a lower discount rate will make future cash flows more valuable in today's terms, potentially making an investment seem more appealing.