A risk-adjusted discount rate, a determinant used to convert future cash flows to their present value, takes into consideration the level of risk associated with an investment or project. The process of calculating a risk-adjusted discount rate involves assessing the inherent risks of an investment and incorporating a risk premium into the discount rate.
Understanding how to calculate this rate plays a pivotal role in financial planning and investment decisions. It empowers investors to make informed choices by appropriately factoring in the risks of an investment and determining the appropriate returns they should expect.