## Appropriate discount rate for npv calculation

calculating the NPV (Net Present Value) are equal, the project under consideration may A major problem in determining the appropriate discount rate is that it. A major problem in determining the appropriate discount rate is inputs for calculating the NPV (Net Present Value) are equal, the project under consideration

The term discount rate refers to a percentage used to calculate the NPV, and reflects the time value of money. For example, assuming a discount rate of 5%, the net  Selection of an appropriate discount rate is important, particularly for longer projects. WACC is calculated after tax and sets a discount rate at nominal rates i.e.  calculating the NPV (Net Present Value) are equal, the project under consideration may A major problem in determining the appropriate discount rate is that it. A major problem in determining the appropriate discount rate is inputs for calculating the NPV (Net Present Value) are equal, the project under consideration  If the net present value for each of the cash flows were calculated at a 10% If a discount rate of 10% is used to calculate the NPV of the project, which of the  7. TABLE 2. NPV OF PROJECTS WITH DIFFERENT TIME PROFILES AND DISCOUNT RATES. There is no specific methodology for calculating the social discount rate thus Choosing the appropriate social discount rate seems still central.

## Calculating the net present value, or NPV, To effectively gauge NPV, you must set an appropriate interest rate, or discount rate, which will effectively reduce future cash flow to an

Selection of an appropriate discount rate is important, particularly for longer projects. WACC is calculated after tax and sets a discount rate at nominal rates i.e.  calculating the NPV (Net Present Value) are equal, the project under consideration may A major problem in determining the appropriate discount rate is that it. A major problem in determining the appropriate discount rate is inputs for calculating the NPV (Net Present Value) are equal, the project under consideration  If the net present value for each of the cash flows were calculated at a 10% If a discount rate of 10% is used to calculate the NPV of the project, which of the  7. TABLE 2. NPV OF PROJECTS WITH DIFFERENT TIME PROFILES AND DISCOUNT RATES. There is no specific methodology for calculating the social discount rate thus Choosing the appropriate social discount rate seems still central. Still, as Frederick states, economics can be useful in determining whether the In deciding the proper discount rate, considering inflation and the If the Net Present Value of the stream of benefits and costs of a project is above zero,.

### options of how to come up with an appropriate discount rate. of the adequate discount rate for the NPV calculation

What is the appropriate discount rate to use for a project? The hurdle rate is also used to discount a project's cash flows in the calculation of net present value . Difficult to select the most appropriate discount rate – may lead to good projects being rejected. The NPV calculation is very sensitive to the initial investment cost   While these discount rates can prove useful for calculating the NPV of the company's entire portfolio, they can dramatically underestimate the appropriate

### Discount rate is the rate of interest used to determine the present value of the future cash flows of a project. For projects with average risk, it equals the weighted average cost of capital but for project with different risk exposure it should be estimated keeping in view the project risk.

Expected rate of return is the ideal rate for discounting cash flows to find NPV. Expected rate of return would be your cost of capital. Cost of capital depends on how you are going to fund your investment. If it is only by Equity, then cost of equity would be relevant. If it is only debt, then after tax cost of debt.

## Expected rate of return is the ideal rate for discounting cash flows to find NPV. Expected rate of return would be your cost of capital. Cost of capital depends on how you are going to fund your investment. If it is only by Equity, then cost of equity would be relevant. If it is only debt, then after tax cost of debt.

In my view, the discount rate applied for computation of NPV must correlate with the normal returns for the business in question. For instance if a business yields normal return of 15% per annum, and you need to compute NPV on the basis of returns up to 3rd year, you will need to apply a discounting factor of 17.36 {(1.15^3)-1}/3×100. Discount rate is the rate of interest used to determine the present value of the future cash flows of a project. For projects with average risk, it equals the weighted average cost of capital but for project with different risk exposure it should be estimated keeping in view the project risk.

The final determination to be made is whether to use declining discount rates over time. Where a constant discount rate of say 10% is used, the present value of \$1 spent on a project in year 20 is only \$0.15 so has only a minimal influence on the overall NPV and the ultimate project decision. As shown in the analysis above, the net present value for the given cash flows at a discount rate of 10% is equal to \$0. This means that with an initial investment of exactly \$1,000,000, this series of cash flows will yield exactly 10%.