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it depends on different economies
risk free rate+inflation rate+profit+relevent risk+political risk
The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate. A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.
The hurdle or the minimum rate of return established by the company can used as the discount rate. If hurdle rate is not available, the firm may use the weighted average cost of capital and adding a risk premium to it.
n Critical ingredient in discounted cash flow valuation. Errors in estimating the discount rate or mismatching cash flows and discount rates can lead to serious errors in valuation.
n At an intuitive level, the discount rate used should be consistent with both the riskiness and the type of cash flow being discounted.
• Equity versus Firm: If the cash flows being discounted are cash flows to equity, the appropriate discount rate is a cost of equity. If the cash flows are cash flows to the firm, the appropriate discount rate is the cost of capital.
• Currency: The currency in which the cash flows are estimated should also be the currency in which the discount rate is estimated.
• Nominal versus Real: If the cash flows being discounted are nominal cash flows (i.e., reflect expected inflation), the discount rate should be nominal
An opponent who has to be the net present value of the investment project is equal to zero rate.
I support the answer given by Mr. Malik Khalid Mahmood.
Agree with Mr. Malik Khalid Mahmood
All answers are correct
AGREE WITH ALL ANSWERS
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