Picking an appropriate discount rate involves balancing the time value of money with the specific risks of a project or investment, commonly set using the Weighted Average Cost of Capital (WACC) for companies or a risk-adjusted rate for specific projects. Common approaches include using a risk-free rate for low-risk scenarios (like government bonds), or adding risk premiums to account for market volatility and investment-specific uncertainties.
To take 20% off a price, calculate 20% of the original price (multiply by 0.20 or divide by 5) to find the discount amount, then subtract that discount from the original price to get the final price you pay. For example, 20% off $100 is a $20 discount, making the final price $80.
How to calculate discount rate. There are two primary discount rate formulas - the weighted average cost of capital (WACC) and adjusted present value (APV). The WACC discount formula is: WACC = E/V x Ce + D/V x Cd x (1-T), and the APV discount formula is: APV = NPV + PV of the impact of financing.
Typical discounts range from 0% to 20%. Let's say you hold a convertible note with a 20% discount rate. If a venture capitalist invests in that company at $20 million valuation paying $3 per share, your note converts to equity at $2.40 ($3.00 * . 8) per share.
The calculation uses two simple formulas: Discount Amount = Original Price × (Discount % / 100), and Final Price = Original Price – Discount Amount. If tax is applied after discount, Total Price = Final Price + Tax Amount.
What is Discount Rate? | Learn with Finance Strategists | Under 3 Minutes
Is 10% a good discount rate?
A discount rate of 10% is commonly used, as it is generally around the return that firms make on their other investments. In some organizations, it is known as a “hurdle” rate.
A higher Discount Rate indicates higher risk and greater potential upside, while a lower Discount Rate means lower risk and lower potential upside. The Discount Rate has dozens of uses in finance, but for a simple example, consider whether you would invest in Google or Microsoft.
To work out 20% on a calculator, you can either multiply the number by 0.20 (e.g., 80 x 0.20 = 16) or, if your calculator has a % button, type the number, press ×, type 20, then press % (e.g., 80 × 20 %). For discounts or increases, you can also subtract the percentage (80 - 20 %) or add it (80 + 20 %) using the % key.
To take 10% off a price, divide the price by 10 to find the discount amount, then subtract that amount from the original price, or simply multiply the price by 0.9 (90%) to get the final price directly; for example, 10% off $50 is $5, making the final price $45, while $50 multiplied by 0.9 is also $45.
To discount future values, and generate the present value (PV), each value is deflated by a certain percent for each year in the future. For example, using a discount rate of 3%, a benefit of $20 occurring each in Years 1 and 2 would be valued at $38.27 today.
