The discount rate is the rate at which you shrink future money back to today's value. If someone offers you $1,000 in 5 years and the discount rate is 10%, that promise is worth only $621 today. The higher the discount rate, the less future cash flows are worth today. It is the core engine of all valuation in finance.
In corporate finance, the discount rate is usually the WACC (Weighted Average Cost of Capital) — reflecting what investors expect to earn. In central banking, the discount rate is the rate at which the Fed or RBI lends to commercial banks. The Federal Reserve's discount rate directly influences all borrowing costs in the US economy.
Choosing the right discount rate is the most important and most debated assumption in any DCF valuation. A 1% change in discount rate can swing a company's valuation by 15-25%. Riskier investments demand higher discount rates — a stable utility might use 7%, while a startup might use 20%. Getting it wrong means over- or under-paying by millions.