A blended discount rate is a weighted average of multiple discount rates used to calculate the present value of future cash flows. It is commonly applied in project evaluation, capital budgeting, and financial planning. For instance, a company considering a project with both operating and financing cash flows may use a weighted average of the cost of capital and the cost of debt as its blended discount rate.
Calculating a blended discount rate is crucial for accurately assessing the risk and return of an investment. It aids in decision-making by considering the time value of money and the different components of cost. Historically, the development of sophisticated financial models and computational tools has simplified the calculation and application of blended discount rates.