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Discount Rate

The term discount rate refers to the rate at which future payments or payment streams must be discounted to measure their value in prior time periods or in the current period. The use of a discount rate allows adjustment for the fact that future payments are not as valuable as equal payments received in prior time periods, a concept known as the time value of money. Discount rates are used in the discounted cash flow procedure and as part of net present value analysis. This entry discusses why discount rates are necessary and how they are calculated and covers some more complex usages of discount rates.

Why Is a Discount Rate Needed?

The first question that needs to be addressed is why an adjustment on future values ...

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