Evaluating future cash flows requires assessing their present value – a concept heavily reliant on discount rates. Discount rate plays a crucial role in the analysis, as it reflects the time value of money, factoring in inflation, risk, and alternative investment opportunities.
The discount rate is not a fixed value but rather a reflection of the current economic climate and the inherent risk associated with the investment under consideration. For instance, a high-risk investment would demand a higher discount rate to account for the increased uncertainty.