Discount rate

The discount rate is used to calculate how much the expected future income from an investment over a given period of time is worth right now (the net present value), which can help you decide what you should pay for it.

The rate used is usually based on the risk-free rate – the annual return you could expect to get on your money if you put it in the bank, or into a safe investment, such as UK government bonds over the same period. For example. if you are using a 5% discount rate, then £105 in a year’s time is worth the same as £100 today.

The riskier the investment, the higher the discount rate you should apply – after all, you expect to get higher return from a risky investment than for putting your money in the bank.

Merryn

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