A common discount rate for NPV refers to a prevailing interest rate used to evaluate the present value (PV) of future cash flows in a project, investment, or financial decision. For instance, a common discount rate of 10% implies that each dollar received in the future is worth 1/(1+10%) less today. This concept plays a crucial role in capital budgeting and financial analysis.
Using a common discount rate enables consistent comparisons among different projects and facilitates informed decision-making. It is particularly relevant in industries where cash flows are spread over an extended period, such as infrastructure, real estate, and pharmaceuticals. Historically, the development of sophisticated financial modeling and valuation techniques has led to the widespread adoption of common discount rates.