The discount rate as a parameter of the analysis of investment planning

Doing any kind of activity is impossible without a thorough financial analysis, which also includes investment planning, business planning for the future and current performance evaluation. In this case, 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 an accurate and thorough calculation of the value of cash flows. It is the analysis of incomes of future periods in the context of sources of revenue that represents the process of discounting. The basis of this activity is accurate analytical data.

To minimize discrepancies between 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 available property and, of course, the discount rate (it is the discount rate).

It is the latter indicator that characterizes the price of capital established 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 rate of return acceptable to the investor per ruble of invested capital, which could be when investing in an alternative, not-so-risky venture.

For a more thorough understanding, it is easier to say. For example, after 5 years a person wants to receive 10,000 conventional monetary units. The discount rate allows you to determine how much it needs to invest in a certain production, in order to manage the desired amount in the future. Therefore, this indicator has a key influence on the choice of the investment project.

In addition, the parameter is used in all spheres and industries. And its purpose is not always investment planning. It also characterizes the activities of any organization. The discount rate is indispensable in analyzing the cost of capital investments, as well as all possible aggregate costs for business planning.

Just as in the analysis of investment infusions, the management of any company has the opportunity to choose the least expensive way of production or the most profitable. Both can determine the rate of discount. The formula that helps to calculate the size of this indicator includes a huge number of various parameters, such as:

- interest rate (established by the owner of the borrowed capital);

- the rate of return (that rate of return, which is established on equity);

- the level of inflation ;

- 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 - 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 non-receipt of the expected income.

Risk-free activities are found only in ideal models of the economy. And such at the moment does 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.