Discounted Cash Flow Analysis

[Stephen Seaberry]

Hey BP,

So I am reading What Every Real Estate Investor Needs to Know About Cash Flow by Frank Gallinelli, great book so far. However, I'm really getting hung up on the concept of Discount Rate. In the book he uses 10% as the discount rate to determine the NPV of cash flows over a given period. At first, I thought this meant CoC return, but when I did the math in his example I realized that CoC was different from the discount rate.

Then I Googled the answer and came across this explanation:

When solving for the future value of money set aside today, we compound our investment at a particular rate of interest. When solving for the present value of future cash flows, the problem is one of discounting, rather than growing, and the required expected return acts as the discount rate. In other words, discounting is merely the inverse of growing.

This only confused me more.

So my simple question is, why are we discounting future cash flows at all? If he didn't use 10% and, instead, used a more familiar number, like say 4% I would conclude it had to do with inflation and the purchasing power of a dollar. Easy enough. But 10%? What external factors contribute to the discount rate if not inflation alone? What basic assumptions should I make in my analysis on what the discount rate should be? Does this vary wildly from one market to the next? I have no idea how to approach the answers to these questions, without first getting a layman's explanation of what this factor actually is.

Thanks,
Stephen