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The rate of interest which is used to discount to their present-day value earnings arising in the future. With positive interest rates, a sum of money which is invested will increase in value over time and hence the present value of money is less than its value in the future. The size of the discount rate will affect the appraised viability of those projects to which it is applied. Broadly, the higher the discount rate the lower will be the present value of earnings (or benefits) arising in the future and the greater the negative impacts on projectfeasibility. The discount rate is determined pragmatically by the sponsor. Ideally it should take account of the sponsor's cost of capital, the rate of inflation, interest rates and rates of return on investments throughout the economy.
Note: There is a difference between "real" discount rates and "nominal" discount rates. Real discount rates are used in conjunction with cash flows which are expressed in terms of present-day money values, with no allowance for priceinflation. (The cash flows should, however, allow for increments in future over and above price inflation, e.g. real wage increases.) Nominal discount rates, on the other hand, are higher than real discount rates and are applied to cash flows which make specificallowance for future price inflation at an estimated rate. [D04969]