From the course: Financial Modeling Foundations

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Discount rates in models

Discount rates in models - Microsoft Excel Tutorial

From the course: Financial Modeling Foundations

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Discount rates in models

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- [Instructor] Interest rates and other factors play directly in the financial models in many cases, but they can also indirectly influence a value that we call WACC or waited average cost of capitol. WACC is essentially the cost that a company pays on average to raise money for any sort of project or investment. It's a combination of the cost of equity and the cost of debt. One of the key determinants for whether we should proceed with a particular project is whether our IRR in a particular project is greater than the WACC in that project, which is generally represented by the discount rate. In our model here, we're using a discount rate of 9%, which is correlated to the WACC for the company in question or the investment in question. Now, what impact does WACC have on the valuation of this project? Well we can see very simply, if we change discount rate from say 9% to 10%, that the implied price per share in the future on this investment falls. If we take the discount rate up to say…

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