Discount factor: Difference between revisions
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(DF). Strictly, the number less than one which we multiply a future cash flow by, to work out its present value as: | (DF). Strictly, the number less than one which we multiply a future cash flow by, to work out its present value as: | ||
PV = DF x future cashflow. | |||
The periodic discount factor is calculated from the periodic yield as: | The periodic discount factor is calculated from the periodic yield as: | ||
DF = (1 + periodic yield)<SUP>-1</SUP> | |||
Commonly abbreviated as DF(n,r) or DF<SUB>n</SUB> | Commonly abbreviated as DF(n,r) or DF<SUB>n</SUB> | ||
where n = number of periods, and | |||
r = periodic cost of capital. | |||
For example when the periodic cost of capital (r) = 6% and the number of periods in the total time under review (n) = 2, then: | For example when the periodic cost of capital (r) = 6% and the number of periods in the total time under review (n) = 2, then: | ||
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* [[Factors]] | * [[Factors]] | ||
* [[Present value]] | * [[Present value]] | ||
Revision as of 14:03, 28 May 2013
1. (DF). Strictly, the number less than one which we multiply a future cash flow by, to work out its present value as:
PV = DF x future cashflow.
The periodic discount factor is calculated from the periodic yield as:
DF = (1 + periodic yield)-1
Commonly abbreviated as DF(n,r) or DFn
where n = number of periods, and
r = periodic cost of capital.
For example when the periodic cost of capital (r) = 6% and the number of periods in the total time under review (n) = 2, then: Discount factor = (1+r)-n = 1.06-2 = 0.8890
2. Loosely, the yield or cost of capital used for the purpose of calculating Discount Factors. For example the 6% rate applied in definition 1. above.
