Valuation and investment
Discount rate and hurdle rate
The rate used to turn future cash into today's value.
Last reviewedWhat does Discount rate and hurdle rate mean?
The discount rate is the yearly rate used to convert future cash into its value today. It reflects the return investors could earn elsewhere at similar risk, so riskier projects use higher rates. With a 10% rate, 110 received in one year is worth 100 today. A hurdle rate is the minimum return a company requires before it approves a project, often set at or above its cost of capital.
Where does it come up in case interview prep?
- Service delivery, KPIs and public-private partnershipsLesson in Government, public sector and non-profits
- Investment and capital project decisionsLesson
- Sustainability and decarbonizationLesson
- Power economics and operations: levelized cost, the merit order, storage and the gridLesson in Power, utilities and renewables
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Related terms
- Cost of capital (WACC)The return a company must earn to satisfy its lenders and owners.
- Net present value (NPV)Today's value of all future cash flows, minus the upfront investment.
- IRR (internal rate of return)The discount rate at which NPV is exactly zero.
- Return on investment (ROI)The gain from an investment relative to its cost.
- Payback periodHow long until an investment earns back its cost.
- Time value of moneyMoney today is worth more than the same money later.
- DCF (discounted cash flow)Valuing a business from the future cash it will generate.
- Enterprise value (EV) and EV/EBITDAThe value of the whole business, to lenders and owners together.