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A colleague recommends using 10% as the discount rate, all the time, eliminating the work involved...

A colleague recommends using 10% as the discount rate, all the time, eliminating the work involved in figuring it out. Critique his belief, either agreeing or disagreeing.

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Answer #1

Discount rate is the interest rate used to discount future cash flows to calculate the present value of the cash flows. Or it can  also be defined as the interest rate earned on a bank deposit on some future date making X value today worth (1+R)*X value on a future date.

It is usually of the range of 6-12%. The discount rate may vary depending on the interest rate charged by the banks & with any changes introduced by the monetary policy.

Using a stable discount rate irrespective of the current or forcasted financial climate is a very crude & simplified method which ignores the impact of changes. The calculation result will be incorrect if not discounted using the correct rate. The inaccuracy will increase with increase in the amount being discounted. Also the discount rate differs from one purpose to another.

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