How does a low-interest-rate environment affect DCF valuations?

In a low-interest-rate environment, the cost of capital tends to decrease since interest rates are a critical component of the discount rate used in Discounted Cash Flow (DCF) valuations. The discount rate reflects the opportunity cost of investing capital and the risk associated with the investment. When interest rates are low, the discount rate used to bring future cash flows back to their present value also decreases.

As a result, when future cash flows are discounted at a lower rate, their present value increases. This leads to higher valuations for companies or projects, as the discounted cash flows contribute more significantly to the overall valuation. Investors may be more willing to pay higher valuations for assets when borrowing costs are low, as it enhances their purchasing power and potential returns from investments. Therefore, lower interest rates positively influence DCF valuations, leading to an increase in valuations.