What is Discount Rate in NPV Calculations?
The discount rate in Net Present Value (NPV) calculations is the rate used to convert future cash flows into present value. It reflects the time value of money and the risk or opportunity cost of investing capital elsewhere. A higher discount rate reduces the present value of future cash flows, potentially making an investment less attractive.
Definition Table
Example: NPV with Different Discount Rates
Scenario:
An investor expects to receive $10,000 per year for 3 years from a real estate investment.
NPV Formula

Where:
- t = year (1, 2, 3)
- r = discount rate
- Cash Flow = $10,000/year
Calculation
Interpretation
As the discount rate increases, the NPV decreases. That’s because future cash is considered less valuable when your expected return (or risk) is higher.