Net present value (NPV) analysis is a capital budgeting technique used to assess the profitability of investment projects. A key component of NPV analysis is the discount rate, which represents the rate at which future cash flows are discounted to their present value.
Calculating the discount rate accurately is crucial for obtaining meaningful NPV results. Various methods can be employed, and the appropriate choice depends on the project’s risk profile, industry, and economic climate. The Weighted Average Cost of Capital (WACC) is a commonly used approach that takes into account the cost of both debt and equity financing.