The discount rate 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. Spreadsheets make it easy to calculate the appropriate discount factors.
Typically the discount rate is decided at the corporate level and has the dual purpose of compensating for both the time value of money and the risk inherent in the activity. A general principle to employ is that the riskier the project, the greater the discount rate to use.
- ^ Investopedia. Dictionary: Discount Rate.
- ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.