how the discount rate works in cash flow analysis
the same term discount rate is used in discounted cash flow analysis dcf is used to estimate the value of an investment based on its expected future cash flows based on the concept of the time value of money dcf analysis helps assess the viability of a project or investment by calculating the present value of expected future cash flows using a discount rate such an analysis begins with an estimate of the investment that a proposed project will require then the future returns it is expected to generate are considered using the discount rate it is possible to calculate the current value of any future cash flows the project is considered viable if the net present value pv is positive if it is negative the project isn t worth the investment in this context of dcf analysis the discount rate refers to the interest rate used to determine the present value for example 100 invested today in a savings scheme with a 10 interest rate will grow to 110 in other words 110 which is the future value fv when discounted by the rate of 10 is worth 100 present value as of today if one knows or can reasonably predict all such future cash flows like the future value of 110 then using a particular discount rate the present value of such an investment can be obtained investopedia theresa chiechi