Discount rate


Discount rate is the percentage rate used to discount future cash inflow, to compensate for present cash outflow, and arrive at project feasibility. 

It is often used with free cash flow calculations.

Example

A startup will have a business model that requires cash outflow at present, with the prospect of cash inflow in the future, once the business starts operations and earns revenue. The financial feasibility (whether revenue can be earned fast enough to stay afloat or present outflow can be remedied by future turnover) is calculated using the discount rate.

Here is a graphic:-

Discount rate
Source : Tavaga Reseach

For risky cash flows, the discount rate is higher.