# Discount Rate Explanation

What is a discount rate? Describe at least two different means to arrive at an appropriate one. What are some disadvantages of any given discount rate? What are some strengths and weaknesses of the Capital Asset Pricing Model? How would someone utilize Capital Asset Pricing Model in a financial decision-making process?

© BrainMass Inc. brainmass.com December 15, 2020, 4:31 pm ad1c9bdddfhttps://brainmass.com/business/capital-budgeting/discount-rate-explanation-253026

#### Solution Preview

What is a discount rate? Describe at least two different means to arrive at an appropriate one.

Discount rate is the interest rate used in finding the present value of future cash flow or series of cash flows using the future value of cash flow or series of cash flows.

The other meaning of discount rate is the interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank.

What are some disadvantages of any given discount rate?

The discount rate used in the calculation of the present value of future cash flow or series of cash flows is assumed to be constant in a given number of periods (usually years). However, other factors like inflation, recession, Federal Reserve policy, etc, may affect the amount of the interest rate. In addition, in the calculation of the discounted cash flows. The estimation of a suitable discount ...

#### Solution Summary

This solution of 616 words defines the discount rate and discusses its disadvantages as well as the strengths and weaknesses of the CAPM.