How To Calculate Discount Rate?

A wide variety of methods can be used to determine discount rates but in most cases these calculations resemble art more than science. Still, it is better to be generally correct than precisely incorrect, so it is worth your while to use a rigorous method to estimate the discount rate.

A good strategy is to apply the concepts of the weighted average cost of capital (WACC). The WACC is essentially a blend of the cost of equity and the after-tax cost of debt. Therefore, we need to look at how cost of equity and cost of debt are calculated.

Discount rate is otherwise known as cost of capital and the term is used in capital budgeting. Most metrics such as NPV, MIRR, Profitability Index and Discounted Payback Period use this rate to discount the cash flows.

A good way to start is for you to look up WACC which stands for Weighted Average Cost of Capital and this is what you referred to as the discount rate.

It is made up of proportions of equities and debts which is multiplied by risk factors and finally summed up.

If you know what your total then the formula would be the following:

T= total
d= discount percent (in decimals)

t x (1 - d)

or if you want to just figure out the discount amount without the calculator automatically taking it out of the total, just do this:

T x d

Regular price:$21.00
amount of discount: $3.15
Discount Rate : Amount of discount / Regular price X 100
ie (3.15/21) X 100 = 15%

Discount allowance is the amount which the seller agrees to reduce when a customer buys product from the seller. There is not a standard method to calculate the discount allowed and different companies use several criteria to determine the discount. For example, some companies offer discount on the basis of payment date like if the customer pays back the amount in 2 days then a specific percentage of discount would be given and if pays the money in 8, 12 or within any number of days then the percentage discount would be different. If a company gives 10% discount to the customer if he gives the cash in 5 days then if the total amount is $500,000 then the discount will be $500,000*0.1 or $50,000.

Regular price:$21.00
amount of discount: $3.15