Conducting any type of activity is impossible without a thorough financial analysis, which also includes investment planning, long-term business planning and ongoing performance assessment. Moreover, the analysis of any of these categories is accompanied by the presence of such a parameter as the discount rate. Accordingly, the higher the risk of the activity, the higher the expectations of investors and owners of capital, and the higher the requirements for accurate and thorough calculation of the cost of cash flows. It is the analysis of deferred income in terms of sources of income is a discount process. The basis of this activity is accurate analytical data.
To minimize discrepancies between the planned forecast indicators and their future actual data, it is necessary to use correctly calculated cost parameters (revenue, costs),
capital structure, investment flows, it is necessary to take into account the residual value of the existing property and, of course, the discount rate (it is also the discount rate).
It is the latter indicator that characterizes the price of capital set independently by the participants in production. Its level depends on the market interest rate, as well as on their own expectations, opportunities and goals. The discount rate shows that the degree of profitability per ruble of invested capital that is acceptable for an investor, which could be if invested in an alternative, not so risky enterprise.
For a more thorough understanding, it can be said easier. For example, after 5 years, a person wants to receive 10,000 conventional monetary units. The discount rate allows you to determine how much he needs to invest in a particular production in order to manage the desired amount in the future. Therefore, this particular indicator has a key influence on the choice of an investment project.
In addition, the parameter is used in all areas and industries. And his goal is not always investment planning. It also characterizes the activities of any organization. The discount rate is indispensable when analyzing the cost of investments, as well as all sorts of total costs for business planning.
Just as in the
analysis of investment injections, the management of any company has the opportunity to choose the least costly method of production or the most profitable. Both that and another allows to determine exactly the discount rate. The formula that helps to calculate the size of this indicator includes a huge number of various parameters, such as:
- interest rate (set by the owner of the borrowed capital);
- income rate (the rate of profit that is established on equity);
- inflation rate ;
- refinancing rate;
- expert review;
- weighted average price of capital, etc.
The discount rate can be determined by the following expression:
R = Rf + (Rmax + Rmin) / 2 + S, where
R is, respectively, the discount rate;
Rf - risk-free rate;
Rmax, Rmin - the value of the maximum and minimum risk premium;
S - accounting for the risk of not receiving the expected income.
Risk-free activities are found exclusively in ideal models of the economy. And these currently do not exist. But there is a huge number of methods for analyzing investment projects, one of which is the method of adjusting the discount rate.