The interest rate used to compute the present value of a future cash flow is called the discount rate.
The discount rate is a crucial concept in finance and investing, as it reflects the opportunity cost of capital. This rate is used to determine how much a future sum of money is worth in today’s terms. Essentially, the higher the discount rate, the lower the present value of the future cash flow, because it assumes a greater return could be earned if the funds were invested elsewhere. The discount rate can be based on various factors including risk, inflation, and the cost of capital, and is often derived from the investor’s required rate of return. Understanding how to apply the discount rate is vital for making informed financial decisions regarding investments and evaluating projects.