What is the impact of the discount rate on NPV?

What is the impact of the discount rate on NPV?

The discount rate is crucial in NPV calculations as it reflects the opportunity cost of capital. A higher discount rate reduces NPV, while a lower rate increases it.

Can you explain why a higher discount rate decreases NPV?

Certainly! A higher discount rate means future cash flows are worth less today, leading to a lower NPV. It reflects higher risk or opportunity costs.

How do I choose the right discount rate for my project?

Choosing the right discount rate involves considering the project's risk, the cost of capital, and market rates. Often, the weighted average cost of capital (WACC) is used.

What happens if I use a discount rate that is too low?

Using a discount rate that is too low can overestimate the NPV, making a project appear more attractive than it actually is, potentially leading to poor investment decisions.