Discount Rate Calculator

Build-up: rate = risk-free + risk premiums. CAPM: Rₑ = R_f + β·ERP [+ premiums]. Implied: r = (FV ÷ PV)^(1/n) − 1. Fisher: (1 + nominal) = (1 + real)·(1 + inflation).

There’s no single discount rate

The discount rate answers “what return must this compensate for?”, and the answer depends on the risk and on what you’re valuing. For a company’s equity, CAPM is the standard: start from the risk-free rate and add beta times the equity risk premium, so riskier stocks (higher beta) demand more. For a private business or a project where beta is unavailable, the build-up method does the same job by hand — risk-free rate plus an explicit stack of premiums for market, size, country and company-specific risk. And sometimes you don’t need to build a rate at all but to read one off existing numbers: given what something is worth today and what it became (or will become), the implied rate is the compound growth that connects them. This calculator does all three, and shows the chosen rate building up component by component so nothing is hidden.

Worked example — CAPM with a 4% risk-free rate, beta 1.1, ERP 5.5%: Cost of equity = 4% + 1.1 × 5.5% = 4% + 6.05% = 10.05%. At that rate money doubles in about 7.2 years (the rule of 72 estimates 72 ÷ 10.05 ≈ 7.2).

Real vs nominal, and compounding — the conversions that bite

Two conversions cause more valuation errors than almost anything else, and few calculators handle them properly. The first is real versus nominal. A nominal rate includes expected inflation; a real rate strips it out. The Fisher equation links them precisely — (1 + nominal) = (1 + real) × (1 + inflation) — which is not the same as simply subtracting inflation, especially at higher rates. The cardinal rule is to match the rate to the cash flows: discount nominal cash flows at a nominal rate and real (today’s-money) cash flows at a real rate. Enter an inflation figure here and the calculator shows both. The second is compounding: a rate compounded continuously differs from the same rate compounded annually, and the calculator converts between them so you can quote the rate the way your model expects.

Where this fits with WACC and IRR

This calculator builds a discount rate from assumptions; two neighbours take it further. For a company financed by both equity and debt, the right discount rate for the whole firm is the WACC — which blends the cost of equity you can compute here with the after-tax cost of debt; build the cost of equity here, then carry it into the WACC calculator. And when the question is “what rate is implied by a whole series of cash flows?” rather than a single present-and-future pair, that’s the internal rate of return — use the IRR calculator for a full stream, and this calculator’s implied mode for the simple two-point case. The doubling-time figure shown alongside every result — how many periods until money doubles at the rate — is there to keep the abstract percentage grounded in something intuitive. Educational tool only, not investment advice.