Some businesses evaluate profitability by calculating the net cash flow they receive from a project on investment. For example, the net cash flow from an investment that costs $500 and will bring in $700 is $200.

The problem with calculating profitability this way is that it doesn't consider the time value of money. Discount rates help investors and managers more accurately calculate profitability by finding the present value of an investment. Under the present value cash flow method, the investor calculates a distinct discount rate for each cash flow the business receives.