Factors that may affect the appropriate discount rate to use for determining the net present value of a capital investment project include

Question

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All of the factors listed (i.e., the riskiness of the investment, expectations of inflation, and market rates of interest) can have an impact on the appropriate discount rate to be used for determining the net present value of a capital investment project. The riskier the investment, the higher the discount rate should be to account for the higher risk premium demanded by investors. Expectations of inflation can also impact the discount rate because investors may demand a higher rate of return to compensate for the loss of purchasing power caused by inflation. Finally, market rates of interest can also impact the discount rate, as changes in interest rates can impact the cost of capital and the required rate of return for investors.

Factors That May Affect the Appropriate Discount Rate to Use