Discount rates are applied to which type of appraisals?

Discount rates are primarily applied in economic appraisals as they are used to determine the present value of future cash flows associated with an investment or project. In economic appraisals, the objective is to assess the overall economic worth or the benefits versus costs of a project over its expected lifespan. The application of discount rates helps to account for the time value of money, which recognizes that a dollar today is worth more than a dollar in the future due to potential earning capacity.

By discounting future benefits or costs, decision-makers can compare them on a common basis, allowing for a more informed evaluation of whether a project is financially viable or aligned with broader economic goals. This essential practice aids in making decisions that reflect not just financial profit but also the wider economic implications of a project, which could include social welfare and long-term value creation.

Other forms of appraisals, while they may also consider financial aspects, do not typically apply discount rates in the same way as economic appraisals do. Financial appraisals focus more narrowly on the financial metrics specific to an organization, investment appraisals are tailored to assess the viability of specific investment options, and portfolio appraisals involve the performance review of a collection of investments or projects without necessarily applying discount rates