A discount rate is a percentage used to calculate the present value of future cash flows. It is used to determine the net present value (NPV) of an investment or project. For instance, if an investment is expected to generate $100,000 in cash flows over five years and the discount rate is 5%, the NPV is $82,270.
Discount rates are important for making investment decisions. They allow investors to compare the potential returns of different investments and choose the ones that are most likely to generate a positive NPV. Discount rates have also benefited from historical developments, such as the invention of the calculator and the development of computer software, which have made it easier to perform complex calculations.