Discount factor: Difference between revisions
imported>Doug Williamson (Generalise from one period to any number of periods.) |
imported>Doug Williamson (Link with Day count conventions page.) |
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* [[Compounding effect]] | * [[Compounding effect]] | ||
* [[Compounding factor]] | * [[Compounding factor]] | ||
* [[Day count conventions]] | |||
* [[Factors]] | * [[Factors]] | ||
* [[Present value]] | * [[Present value]] | ||
Revision as of 17:41, 25 October 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 )-n
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.
