How to determine the rate of discount

The norm of discount is used in the evaluation of the effectiveness of investments. Key decisions when choosing an investment project depends directly on the selected values.

For the different calculation steps can be selected different values of the bet cast. This is acceptable in cases of the changing dynamics of risk, amount of debt capital structure.

The impact of a large number of factors makes it difficult to offer a universal selection method indicator. In any case, it needs to reflect the return on capital employed, adjusted for inflation, and alternative available to the investor the risk-free areas of investment.

From a technical point of view, the discount rate can be defined as the interest rate, the basis for determining the market value of the business. The calculation depends on which type of cash flow is used to estimate as a base.

The calculation can be used: the rate of inflation, weighted average cost of capital, valuations, refinancing rate, the profitability of the alternative project, the rate of Bank interest on loans or deposits.

Often capital raising is carried out through several sources. In this case, use the average weighted cost of capital. It is calculated as follows: WACC=∑_(i=1)^n▒〖Di×Ei〗n = number of types of capital;E = rate of discount of the i – th capital;Di = proportion of the i-th capital in total capital.

It is very important to most accurately determine the rate of discount for this direction of investment. This directly affects the amount of income that will result from the investments.