The discount rate refers to the interest rate used when calculating the net present value (NPV) of an investment. It represents the 澳洲幸运5开奖号码历史查询:time value of money, which is the concept that a sum of money today is worth more than the same sum at a🍸 future date.

Why? Because of its earning potential in the intervening period. NPV helps determine whether a proposed project will add value, i.e., geඣnerate a profit. As such it’s a crucial part of corporate budgꩲeting.

In this article, we are looking for the 澳洲幸运5开奖号码历史查询:discount rate that results in the NPV equaling zero. Doing so allows us to determine the 澳洲幸运5开奖号码历史查询:internal rate of return (IRR) of a project o𒐪r an asset. The IRR is the rate of growth that an i🧸nvestment must generate in order not to lose money.

Discount Rate

Let’s begin by examining each step of NPV♕ in order.🍌 The formula is:

NPV = ∑ {After-Tax Cash Flow ÷ (1+r)^t} - Initial Investment (where “t”  is a time period and “r” is ꦺthe discount rate)

Each period’s after-tax cash flow at time “t” is discounted by some rate, wh💞ich is shown as “r.” The sum of al♈l these discounted cash flows, representing the total sum of money the investment is expected to generate expressed in today’s dollars, is then offset by the cost of the initial investment (what will be spent).

The result is the current NPV. Any NPV greater than zero indicates a profitable pro꧂ject. The higher the NPV, the more likely the project will be gree🐟n-lit.

The NPV, IRR, and discount rate are connected concepts. You know the amounts and timings of cash flows with an NPV. You also know the 澳洲幸运5开奖号码历史查询:weighted average cost of capital (WA🐠🙈CC), which is designated as “r” when solving for the NPV. You know the same details with an IRR, and you can solve for the NPV expressed a🐽s a percentage return. 

What is the discount rate that sets the IRR to zero? It’s the same rate that will give the NPV a value of zero. The NPV is zero if the discount rate equals the IRR. The project will break even and have an NPV of zero if the 澳洲幸运5开奖号码历史查询:cost of capital equals the 澳洲幸运5开奖号码历史查询:return of capital.

Calculating the Discount Rate in Excel

You can solve for the discount ๊rate in Excel in two ways:

• Find the IRR in Excel by employing the IRR function, then use it as the discount rate that causes NPV to equal zero. 
• Use What-If analysis, a built-in calculator in Excel, to solve for the discount rate that equals zero.

Method One

Take our NPV/IRR example. We’ve calculated an NPV of $472,169 with an IRR of 57% using a hypothetical outlay, our WACC 澳洲幸运5开奖号码历史查询:risk-free rate, and expected after-tax cash flows.

We’ve already defined the discount rate as a WACC that causes the IRR to equal zero. We can therefore just take our calculated IRR and put it in place of WACC to get the NPV of zero. I🅘t looks like this:

Method Two

Let’s assume that we didn’t calculate the IRR o🐻f 57% as we did above and have no idea what the correct discount rate is. We can use Excel’s What-If calculator in this case.

Go to the Data Tab —> What-If Analysis Menu —> Goal Seek to ꧃get to the What-If solver, plug in the numbers, and Excel will solve for the correct value. Excel will recalculate the WACC to equal the discount rate that makes the NPV zero (57%) when you select “OK.”

Discount Factor

You may also come across the discount factor when working with the discount rate. They aren’t the same thing, but they may be used together in calculations. The discount factor is used in the calculation of 澳洲幸运5开奖号码历史查询:present value (PV), which𝔍 is what a future sum of money is worth in today’s dollars. It’s the numbꦯer that you multiply the future amount of money by to get its worth today.

The discount factor is used by Excel to shed added light on the NPV formula and the impact that discounting can have. Here’s a compar🤪ison of the discount rate and the discount factor.

Discount Rate

• It’s used in the formula that calculates the discount factor along with the time period.
• It represents the time value of money.
• It’s a rate of return determined by a company.
• It’s used in the calculation of PV.

Discount Factor

• It increases as the discount rate increases due to compounding over time.
• It facilitates audits of a discounted cash-flow model.
• It illustrates the effect of compounding.
• It’s an alternative to using the XNPV and XIRR functions in Excel.

The Bottom Line

The discount rate is the interest rate used to calculate NP✨V, which tells you the likelihood that a contemplated project might be profitable. It accounts for the difference between what an amount of cash is worth today and what the same amount will be worth at a later date in today’s dollars.

You can solve for the discount rate 🅷in Excel in two ways. Find the IRR and use it as the discount rate that causes NPV to equal zero. Alternatively, you can use the What-Ifꦚ analysis tool, a built-in calculator in Excel, to solve for the discount rate that equals zero.