What determines the discount rate applied to cash flows for a company?

The discount rate applied to cash flows for a company is primarily determined by the company's cost of capital. This cost reflects the overall risk associated with investing in that company, and it combines the cost of equity and the cost of debt. The cost of capital serves as the minimum return that investors expect for providing capital to the firm, making it a crucial factor in evaluating the present value of future cash flows.

When calculating the present value of future cash flows, the cost of capital is used to discount those cash flows back to their value in today's terms. Using this measure ensures that the analysis accounts for both the opportunity cost of capital and the risk profile of the investment, leading to a more accurate reflection of the value of the firm.

While the current interest rate environment can influence the cost of capital and various other factors may have an impact on profitability, the cost of capital specifically embodies the investor's required rate of return based on the risk associated with the company’s operations and capital structure. Hence, it is the most direct determinant of the discount rate used in cash flow analysis.