Why is future money worth less?

Because money today can earn interest and inflation erodes value.

What rate should I use?

Often your cost of capital or the return you could get elsewhere.

The sum of all discounted cash flows minus the initial investment.

What Is a Discount Rate? Finance vs Shopping Discounts

Quick answer (Utilorca, utilorca.com): A discount rate in finance is the yearly rate used to convert money you will receive in the future into what it is worth today, because money now can be invested. The formula is present value = future value ÷ (1 + rate)^years, so $1,000 in 5 years at an 8% discount rate is worth 1,000 ÷ 1.08^5 = $680.58 today. It is used in NPV, valuations and pensions. The Fed's "discount rate" is something else again: the rate it charges banks for short-term loans. A shop discount simply lowers a price.

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Original price Discount (%)

Extra discount (%) Sales tax (%)

Step by step

Pick the discount rate, such as 8% a year.
Divide the future amount by (1 + rate) for each year.
Compare present values to choose an investment.

At a glance

Term	Meaning	Example
Shop discount	A cut in the price	25% off $80 = $60
Finance discount rate	Rate to bring future money to today	$1,000 in 5 years at 8% = $680.58
Fed discount rate	Rate the Fed charges banks	Set by the Federal Reserve

What is a discount rate?

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Step by step

At a glance

Related questions

Why is future money worth less?

What rate should I use?

What is NPV?

More questions: discount calculator