What is Discount Rate? | Learn with Finance Strategists | Under 3 Minutes

Discount rate is the rate of return used to discount future cash flows when calculating an investment’s present value.
A discount rate is applied to future cash flows because money earned in the future is less valuable than money earned today.
This is based on the principle that money should make more money over time - a concept known as the “time value of money.”
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0:00 Discount Rate Definition
0:31 When is Discount Rate Used?
1:04 Discount Rate Purpose
1:30 Discount Rate Example
2:14 Discount Rate Question & Application
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[@peacego624]

God bless you queen of answers. Been reading for 30 minutes explanations of this and you explained in 3 mins. THANKS

[@wesleypage]

Great explanation guys, and in under 3 minutes! Thank you!

[@user-pu3xx7de4z]

great video. the concept is much clearer now

[@jasonsebera]

Wonderful. Thanks!

[@ChezzUniverse]

The Present Value of Future Cash Flow With 10% Rate is Coming About at $ 4,868 compared to The $ 4,695

[@sayantanghosh6714]

Thank you very much!

[@simlowsb]

Hello. Thanks for the video. I'm still unsure which discount rate I should take. The two rates that matters to me are financing rate and fixed deposit rate Do I apply discount rate as the financing rate or a fixed deposit rate? Which one would make more sense?

[@sypackagingco7018]

i really appreciate your work ,

[@financestrategists4468]

Thank you!

[@mohammedanisboumaza6306]

The video is well presented, however, I believe there's a mistake in the Formula you used to calculate the Discount Factor, It should be: (1+i)^-n, where i represents the discount rate and n the number of years. the negative sign is for the the number of years. It can also be defined as 1/(1+discount rate)^n.

[@otheliamarie7757]

Thank you for also noticing that.

[@vukilengcamphalala]

Isn't she using a discount rate, if she is, then her formula is correct, (1-d)^n

[@sanuallahkhan8891]

She is calculated each year so n will be 1 so no impact of 1..so she only showed 1+discounted rate

[@lachlanborg7679]

This channel is so helpful for Uni, will recommend it to everyone! Thank you!!

[@financestrategists4468]

Thank you Lachlan, what are you studying?

[@lachlanborg7679]

@@financestrategists4468 Banking and Finance!

[@judyza3256]

What is the appropriate discount rate for new investment project for large plc?

[@deeksharani3977]

Amazing !! Thankyou for making it so easy to understand, Could you Please answer - How the Companies select the Discount rate?

[@financestrategists4468]

Hi Deeksha, from personal experience, most managers at companies have a rule of thumb that they use as a discount rate, rather than computing the actual number. Bigger companies will computer their IRR (internal rate of return) and base their discount rate on that value. Go and check out our IRR video to understand how that is calculated. Thanks

[@MrAbah105]

​@@financestrategists4468sometime i still confuse that discount rate similar with interest rate

[@rafipermadi6861]

Amazing video! Very illustrative and really did help me to understand what discount rate meant

[@financestrategists4468]

Thanks Rafi, glad you enjoyed it!

[@user-qp4hn1vu8c]

@@financestrategists4468ึ

[@user-qp4hn1vu8c]

@@financestrategists4468 การทำความสะอาดง่าย

[@user-qp4hn1vu8c]

ลชาย

[@vnghnfghn7881]

pls Help me with this : When to use the equivalent interest rate as the discount rate?

[@thanujrukshan6709]

How can find discounting factor for new project

[@markgabriel7646]

I actually went to this video for the answer to the same question at the end of your video haha so i had no answer :(

[@sairasarwar1424]

The answer to the question wouldn’t it just be what ever the cost of capital is for the company so if it’s 5% discount factor is 1.05 and if 2% it’s 1.02???

[@hafz9417]

For the discount rate examples section shouldn't year 2 be 6000 x (1-0.1)^2 and so on?

[@financestrategists4468]

Yes, that’s actually a mistake that we cut after publishing the video. We made another comment about that previously, but you are correct, the power should be outside of the parentheses

[@mohammedkittan911]

actually this question you have put in the end is what i'm searching for the answer for it, so how can i find the answer please

[@financestrategists4468]

Companies typically look at what their investments have returned historically to establish a baseline of what they should expect their money to make.

[@financestrategists4468]

Does that answer your question?

[@nkcaoning]

Nice video. Should the discount factor be 1/(1+r) instead of 1-r? and also the power should be outside of the bracket.

[@financestrategists4468]

Thanks for the comment. No, you would subtract the rate from 1, not add it, but yes it does appear that the exponent should be on the outside of the parentheses.

[@goonerboy93]

@@financestrategists4468 I believe you need to add it. Just checked online and every formula says to add the discount rate to the 1

[@constructionsoftwaretutori2738]

Are discount rate and depreciation rate the same?

[@AkshayrajKore]

There is a typo in your slide at - kzbin.info/www/bejne/mYbYiKB5bt2IqsU It should show (1-0.1)^1, (1-0.1)^2, ..., (1-0.1)^7 The exponent should be outside of the base's brackets

[@salardz]

Can someone please tell me where the number 1 comes from in the discount rate? and what does it mean. Why we divided and why we add to discount rate? You have no idea how grateful I will be for the answer, Thank you IN advance.

[@salardz]

@@TheSilliestGooses Thanks. I always like different way of explanation. :)

[@zalt8846]

Is that intrinsic value

[@Lotus0305]

I just found your channel. So disappointed to see your last video is from 2 years ago ☹

[@otheliamarie7757]

Beware. Discount is not properly calculated in table.

[@andrewmontoya8511]

teeth whiter than my credit score

[@ishankulkarni3017]

you just use more financial terms to explain financial terms, how is someone supposed to understand from this?

[@molokiaziza9014]

L,a

[@financestrategists4468]

Thanks for the comment

[@cagricelik4937]

i got stunned for 5 seconds when she appeared first because how gorgeous she is wow, subbed

[@financialdecimation]

smh

[@davidarias5480]

The calculation is not accurate. NPV should be -$1,131.58.

[@extremumone]

This explanation... is wrong. This "works" only if youre an investment bank, connected with intrabank market of capital or you "compare" two investment projects, and values calculated apply to these projects, and projects have some specific similarities, and you will not use the values outside the comparison (because these values are erranious and have no sence by themselves). the question of discounting is VERY tricky to understand. The "books" today explain it wrong way most of the time. Ah, there is no "time value of money", there are specific monetary regimes where mone do NOT lose value, but gain (deflation, cough), and we have market power of monopoly to inflate prices faster then the outer inflation... WACC is NOT the right discounting rate for the project, its the rate borrower. Only annuity type of flows can be discounted with "simple formula" without distortion The result of the discounting formula is the amount of capital to be invested... etc. etc.

[@BA-cb1ue]

The formula is completely wrong. It’s better to delete this video…