What is the meaning / definition of Discount Rate in the hospitality industry?
The term Discount Rate, when used in the Discounted Cash Flow (DCF) analysis, refers to the rate by which to discount projected future cash flows. The discount rate thereby expresses the time value of money and can make the difference between whether an investment project is financially viable or not. It does this by allowing insight on the present value of expected future cash flow.
Where to find the discount rate?
The discount rate is usually given as a percentage and refers to the interest paid on cash borrowed.
How to calculate the discount rate?
If no discount rate is given, the discount rate can be found by calculating the WACC. A firms weighted average cost of capital (WACC) is used by investors for valuations. It represents the required rate of return that investors expect from investing in the company. This discount rate is always positive, as the basis of the calculation is time.
- NPV – Net Present Value
- IRR – Internal Rate of Return
- DCF – Discounted Cash Flow
- WACC – Weighted Average Cost of Capital