Discount rates are crucial numerical values used to determine the present value of future cash flows. They play a critical role in economic decision-making, such as evaluating the worthiness of investment projects, pricing of financial instruments, and setting interest rates. A discount rate calculation incorporates factors like the time value of money, risk, and inflation.
Historically, the discount rate was determined by the central bank or government and was largely influenced by economic conditions. Today, complex models are used to calculate discount rates, reflecting factors like the prevailing market interest rates, expected inflation, and the riskiness of the cash flows being discounted.