Used for net gain (NPV) only: it converts future yearly savings into today’s money.
A euro saved in year 10 counts for less than a euro saved next year.
Ask: “If I do not buy PV, what return could I reasonably expect with the same money?”
That return is your discount rate. Examples of “elsewhere”:
- Safe: government bonds, savings accounts, term deposits, often around a few percent (e.g. ~2–4% in quiet periods; higher when interest rates rise).
- Middle: a mix of bonds and cautious investments, often around ~4–6%.
- Riskier: diversified stock markets, long-run expectations are often higher (e.g. ~6–8%+), but not guaranteed year to year.
Recommended default: 5%, middle-ground screening value (not a bank or personal finance advice).
Use lower (e.g. 2–3%) if you compare mainly to low-risk savings/bonds;
use higher if you would otherwise put the money in riskier assets.
Higher rate → lower net gain and often a smaller “best size for money”.
Payback time does not use this rate.
