Discount rate

A rate used to convert future costs or benefits into present values. It determines how strongly timing affects comparisons between money or outcomes received at different dates.

Present value: The value today of a future payment or stream of payments after discounting. Discounting applies the rate to calculate the present value of a future amount.
Weighted average cost of capital: A company’s average financing cost, weighted by the market value of its debt and equity. Businesses commonly use it as a benchmark discount rate for project cash flows.
Interest rate: The price of borrowing money or the return earned on lending or saving it. Interest rates describe borrowing or returns; a discount rate values future amounts relative to today.
Time preference: The tendency to value a benefit received sooner more highly than an otherwise equal benefit received later. It is one proposed basis for discounting future benefits, especially in social evaluation.
Net present value: The present value of an investment’s benefits minus the present value of its costs. A chosen discount rate determines whether the investment’s net present value is positive.
Capital budgeting: The process of evaluating and selecting long-term investments by an organization. The discount rate can change which investment projects appear worthwhile.
Inflation rate: The rate at which the general level of prices rises over time. Inflation changes purchasing power, while discounting changes the present valuation of future amounts.
Ramsey equation: An equation linking a social discount rate to pure time preference, consumption growth, and the elasticity of marginal utility. It makes explicit the assumptions that can determine a social rate.
Continuous compounding: A compounding model in which interest accrues continuously rather than at discrete intervals. Its exponential formula gives a continuous-time form of discounting.
Cost–benefit analysis: A method that compares the social costs and benefits of a policy or project, often in monetary terms. Public evaluations discount future effects to compare them with present costs.

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