Calculating a discount rate is essential for determining the net present value (NPV) of a project or investment. NPV takes into account the time value of money, which states that money today is worth more than money in the future.
The discount rate represents the rate of return that could be earned on an alternative investment, which is often the current market rate for a comparable investment. By discounting future cash flows back to their present value, you can determine if a project is expected to generate a positive return, as well as its overall financial viability.