hexa calculatorhexacalculator.com logo

Discount Rate Calculator

$
$
years
percent

Introduction

This discount rate calculator will help determine the discount rate, the rate of return we use to discount future cash flows back to their present value. This rate is usually the required rate of return that investors expect to earn for an investment of a given size and risk profile.

How to use this Calculator?

By inputting the other variables, you can use the discount rate calculator to find the discount rate, future value, or present value.

The variables in the calculator are:

Future Value
The investment’s value at a future time period (t) with an assumed growth rate in the interim.

Present Value
The current value of future cash flows when they are discounted at the discount rate.

Number of Periods
The number of periods after which the cash flows are received.

Discount Rate
The rate of return required for the present value to compound into the specified future value after N periods.

What is Discount Rate?

The discount rate is the rate of return we should use to discount future cash flows back to their present value.

This rate is usually the required rate of return that investors expect to earn for an investment of a given size and risk profile.

You could also think of the discount rate as the percentage of return that the investor would receive for investing a dollar today.

Furthermore, we use the discount rate to calculate the present value of the cash flows as part of the discounted cash flow analysis.

Generally, we use the discount rate to understand the investment’s riskiness, gauge the firm’s opportunity cost, and act as a hurdle rate for investment decisions.

Basically, there are a few types of discount rates

  • Weighted Average Cost of Capital (WACC)
  • Cost of Equity
  • Cost of Debt
  • Predefined Hurdle Rate
  • Risk-Free Rate

How to calculate Discount Rate?

We can calculate the discount rate using the following formula:

Discount Rate=(Future ValuePresent Value)1n−1\text{Discount Rate} = \bigg(\frac{\text{Future Value}}{\text{Present Value}} \bigg)^{\normalsize \dfrac{1}{n}} - 1

Where,

Future Value → Value of Cash Flow at Nth Period

Present Value → Value of Cash Flow at the current date

n → Period Number of the Future Cash Flow

Example

Person A has $9,000 and wants to get $15,000 in 3 years as the total amount. What is the discount rate needed to generate this return?

To determine the discount rate we used the formula

Discount Rate=(Future ValuePresent Value)1n−1=($15,000$10,000)13−1=14.47%\begin{aligned} \text{Discount Rate} &= \bigg(\frac{\text{Future Value}}{\text{Present Value}} \bigg)^{\large \frac{1}{n}} - 1 \\[10pt] &= \bigg(\frac{\$15,000}{\$10,000} \bigg)^{\large \frac{1}{3}} - 1 \\[10pt] &= 14.47\% \end{aligned}
Author

hexacalculator design team

Our team blends expertise in mathematics, finance, engineering, physics, and statistics to create advanced, user-friendly calculators. We ensure accuracy, robustness, and simplicity, catering to professionals, students, and enthusiasts. Our diverse skills make complex calculations accessible and reliable for all users.

You might also like