Discount rate calculation in accounting is a process for determining the present value of future cash flows by considering the time value of money. For instance, a company planning to buy a new machine in five years, costing $100,000 with a 5% discount rate, would calculate the present value to be roughly $78,352.
This calculation is crucial for various accounting applications, such as capital budgeting, financial analysis, and impairment testing. It helps businesses make informed decisions by weighing the present value of future cash flows against current costs. Notably, the concept of a discount rate originated in the early 20th century with the development of bond pricing models.