Discount factor
(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
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) = 1, then:
Discount factor = (1+r)-n
= 1.06-1
= 0.9434
The greater the time delay, the smaller the Discount Factor.
For example when the periodic cost of capital = 6% as before, but the number of periods delay increases to 2, then:
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 and historically, the yield or cost of capital used for the purpose of calculating Discount Factors.
For example the 6% rate applied in definition 1. above.
