Discount factor

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 DF_n

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.

See also

• Annuity factor
• Compounding factor
• Factors
• Present value