Discount Rate
Percentage applied to future cash flows to calculate present value.
Formula
Present Value = Future Cash Flow ÷ (1 + r)ⁿ
Real World
When Unilever evaluates whether to build a new factory, it applies a discount rate (e.g. 10%) to projected future revenues to calculate net present value — a higher rate makes the project look less attractive.
Exam Focus
In NPV questions, show the discount calculation explicitly and state that a higher rate reflects greater risk, reducing present value.
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