What is Discount Rate ? The next step in the Discounted Cash Flow model is the determination of an appropriate rate to discount future cash flows. The discount rate is the aggregate of risk-free rate and risk premium to account for the riskiness of the business. Key inputs or adjustments for calculating the discount rate are discussed below: Theoretically, the risk-free rate is the rate of return on an asset with no default risk. In practice, long-term interest rates on government securities are used as a benchmark. It is quite natural to assume that the riskier investments should have a higher return. This necessitates the incorporation of an appropriate risk premium in the discount rate. There exist a number of models for determination of risk premiums, such as the capital asset pricing model, arbitrage pricing model, multi-factor model, etc. The risk premium is also adjusted to incorporate risks associated with the stage and size of the business and other compa...