The discount rate formula for net present value (NPV) in Excel is a mathematical equation used to calculate the present value of a series of future cash flows. It is a critical tool in capital budgeting and investment analysis to determine the profitability of a project.
The formula, which factors in the time value of money, is particularly relevant to long-term investments. For instance, a project that generates positive cash flows in the future may not be as valuable as it appears if the discount rate is high, indicating a higher opportunity cost of capital. Historically, the discount rate concept emerged from the idea of compound interest, which recognizes that money grows exponentially over time.