How is discount rate decided

Question

Accepted Answer

Discount rate is decided based on various factors such as inflation, risk, market conditions, and opportunity cost.

Discount rate is the rate at which future cash flows are discounted to their present value.
It is determined by considering the prevailing market interest rates, inflation rates, and the level of risk associated with the investment.
The opportunity cost of investing in one project over another is also taken into account while deciding the discount rate.
For example, if a company has a choice between investing in a project with a guaranteed return of 5% and another project with a higher risk but a potential return of 10%, the discount rate for the second project would be higher.
The discount rate is an important factor in determining the net present value (NPV) of an investment project.

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