Financial Analysis
Discount Rate
The rate applied to future cash flows to convert them to present value in a DCF model. For small private businesses, typically falls in the 12-18% range.
The rate used to convert projected future cash flows to their present value in a discounted cash flow (DCF) analysis. The discount rate reflects the risk and opportunity cost associated with the investment. For small, privately held businesses, the rate typically falls in the 12-18% range, reflecting illiquidity, owner dependence, and other risk factors not present in publicly traded comparables. A higher rate produces a lower present value; a lower rate produces a higher present value. (Also see DCF, Terminal Value, Free Cash Flow.)