What is a Discount Rate?

discounts seinfeld

Discount rate is synonymous with yield and IRR. Basically, it is the interest rate an investment must earn in order to produce a given amount in the future. Discount rates are used to guide decision making. Through the discounted cash flow analysis model, future income streams for the holding period combined with the sales proceeds from disposition are discounted and converted into a present value. That present value indicates the value of those proceeds if they were received today rather than in the future with the underlying concept being that those funds might be invested elsewhere for a similar return. Cash flows can be analyzed on a before and after-tax basis as well as on a leveraged or unleveraged basis. Perhaps the most useful application of the discounted cash flow analysis is to help investors determine how much to pay for a property based on projections and their required yield. While discount rates are relatively subjective there are metrics that can provide guidance on which rate to use, which I will discuss in later articles.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s