why is the discount rate so critical?

The discount rate is a critical element of financial decision making because it establishes the basis for comparing returns on investments. When used to evaluate investments, the discount rate acts as a proxy for the cost of capital. When calculating the amount of money that can be saved over time, the discount rate is the rate used to determine the present value (PV) of the future cash flows. This PV is then compared to the original cost of the investment in order to determine the profitability of the investment. The higher the discount rate, the lower the PV, which indicates a less lucrative investment. Therefore, setting the correct discount rate is key to accurately evaluating the returns from an investment.