# Discount rate

(diff) ← Older revision | Latest revision (diff) | Newer revision → (diff)

The discount rate is the interest rate that firms use to determine how much a future cash flow is worth in the present. The practice of using the discount rate to evaluate cash flows is called discounting[1][2]

Using the discount rate, the calculation finds the present value:

Present value =
• = Period of time measured in years
• = The discount rate (interest rate) expressed as a decimal
• The future value after the whole period of time ()

If the future value after one year is $10,500 and the discount rate is 5% then: Present value = Present value =$10,000

If a consumer wants to save their money to earn interest so they can buy a new TV in 2 years, then they can use the price of the TV ($2,500, assuming it does not change) and find out how much money they need to save at 7% interest: Present value = Present value =$2,183.59

If they put \$2,183.59 away at 7% interest over 2 years then they will have the right amount of money to buy the TV they want.