Which has a bigger impact if you change revenue by 1% versus the discount rate by 1%?

Which has a bigger impact if you change revenue by 1% versus the discount rate by 1%?

• A. A 1% change in the discount rate
• B. A 1% change in revenue
• C. They have identical impact
• D. It cannot be determined

Answer: (A)

In discounted cash flow valuation, value is driven by discounting future cash flows, so small moves in the discount rate can ripple through every future cash flow. That effect compounds over time, making the present value highly sensitive to the rate. A quick way to see this is the perpetuity intuition: value equals cash flow divided by the discount rate (PV = C / r). If the discount rate rises by a small amount, the denominator nips the value noticeably and the percentage drop in value is roughly proportional to the size of the rate move divided by the rate itself. For example, with a 10% rate, a 1 percentage point increase reduces value by about 10% (roughly ΔPV/PV ≈ -Δr/r). Meanwhile, a 1% increase in revenue pushes cash flows up by about 1%, and the resulting change in value is not amplified by the same discounting effect. So the impact of changing the discount rate is larger than changing revenue by the same small amount, especially over longer forecast horizons. That’s why the discount rate move dominates in this comparison.

In discounted cash flow valuation, value is driven by discounting future cash flows, so small moves in the discount rate can ripple through every future cash flow. That effect compounds over time, making the present value highly sensitive to the rate. A quick way to see this is the perpetuity intuition: value equals cash flow divided by the discount rate (PV = C / r). If the discount rate rises by a small amount, the denominator nips the value noticeably and the percentage drop in value is roughly proportional to the size of the rate move divided by the rate itself. For example, with a 10% rate, a 1 percentage point increase reduces value by about 10% (roughly ΔPV/PV ≈ -Δr/r). Meanwhile, a 1% increase in revenue pushes cash flows up by about 1%, and the resulting change in value is not amplified by the same discounting effect. So the impact of changing the discount rate is larger than changing revenue by the same small amount, especially over longer forecast horizons. That’s why the discount rate move dominates in this comparison.