Discount factor: Difference between revisions
imported>Doug Williamson (Clarify that 'yield' and 'cost of capital' are equivalent in this context.) |
imported>Doug Williamson (Standardise appearance of page) |
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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> | DF = ( 1 + periodic yield )<SUP>-1</SUP> | ||
Commonly abbreviated as DF(n,r) ''or'' DF<SUB>n,r</SUB> | Commonly abbreviated as DF(n,r) ''or'' DF<SUB>n,r</SUB> | ||
Where: | |||
n = number of periods. | |||
n = number of periods | |||
r = periodic yield (cost of capital). | r = periodic yield (cost of capital). | ||
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''' | '''Example 1''' | ||
Periodic cost of capital (r) = 6%. | |||
Number of periods in the total time under review (n) = 1. | |||
Discount factor = (1+r)<sup>-n</sup> | Discount factor = ( 1 + r )<sup>-n</sup> | ||
= 1.06<sup>-1</sup> | = 1.06<sup>-1</sup> | ||
= | = 0.9434. | ||
The greater the time delay, the smaller the Discount Factor. | The greater the time delay, the smaller the Discount Factor. | ||
'''Example 2''' | |||
Periodic cost of capital = 6%. | |||
The number of periods delay increases to 2. | |||
Discount factor = (1+r)<sup>-n</sup> | Discount factor = ( 1 + r )<sup>-n</sup> | ||
= 1.06<sup>-2</sup> | = 1.06<sup>-2</sup> | ||
= | = 0.8890. | ||
''(A smaller figure than the 0.9434 we calculated previously for just one period's delay.)'' | ''(A smaller figure than the 0.9434 we calculated previously for just one period's delay.)'' | ||
Revision as of 15:53, 21 March 2015
(DF).
1.
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,r
Where:
n = number of periods.
r = periodic yield (cost of capital).
Example 1
Periodic cost of capital (r) = 6%.
Number of periods in the total time under review (n) = 1.
Discount factor = ( 1 + r )-n
= 1.06-1
= 0.9434.
The greater the time delay, the smaller the Discount Factor.
Example 2
Periodic cost of capital = 6%.
The number of periods delay increases to 2.
Discount factor = ( 1 + r )-n
= 1.06-2
= 0.8890.
(A smaller figure than the 0.9434 we calculated previously for just one period's delay.)
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.
