How to define norm of discount

How to define norm of discount

The norm of discount represents the profitability level which the investor at an investment of money wishes to have. With its help it is possible to define, how many it is necessary to pay today to receive the necessary sum in the future.

It is required to you

- calculator;
- knowledge of the financial analysis.

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The norm of discount is applied at an assessment of efficiency of investments. Adoption of key decisions at a choice of the investment project directly depends on the chosen value of this indicator.

For different steps of calculation unequal values of a rate of reduction can be chosen. It is acceptable in cases of the risk changing in dynamics, sizes of borrowed funds, structures of the capital.

Influence of a large number of factors complicates opportunity to offer some universal method of a choice of an indicator. Anyway, it has to reflect the profitability of the invested capital inflation-adjusted of the risk-free directions of investment of capital, alternative and available to the investor.

From the technical point of view the discount rate can be defined as an interest rate, a basis for determination of market value of business. Calculation depends on what type of a cash flow is used for an assessment as base.

At calculation can be used: rates of inflation, average cost of the capital, expert assessment, refinancing rate, profitability of the alternative project, rate of bank percent on loans or deposits.

Most often attraction of the capital is carried out at the expense of several sources. In this case apply an indicator of the average cost of the capital. It pays off on a formula:

WACC =? _ (i=1) ^n-? Di? Ei?
n = quantity of types of the capital;
E = norm of discount of i – go the capital;
Di = capital i-go share in the total value of the capital.

It is very important to define most precisely norm of discount for this direction of investments. It directly influences the income size which will be received as a result of investment.