Discount factor: Difference between revisions
imported>Doug Williamson (Standardise example titles) |
imported>Doug Williamson (Note that cost of capital (r) is periodic.) |
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n = number of periods. | n = number of periods. | ||
r = periodic yield (cost of capital). | r = periodic yield (or periodic cost of capital). | ||
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<span style="color:#4B0082">'''Example 1: Discount factor calculation'''</span> | <span style="color:#4B0082">'''Example 1: Discount factor calculation'''</span> | ||
Periodic cost of capital (r) = 6%. | Periodic yield or cost of capital (r) = 6%. | ||
Number of periods in the total time under review (n) = 1. | Number of periods in the total time under review (n) = 1. | ||
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<span style="color:#4B0082">'''Example 2: Increasing number of periods delay'''</span> | <span style="color:#4B0082">'''Example 2: Increasing number of periods delay'''</span> | ||
Periodic cost of capital = 6%. | Periodic yield or cost of capital = 6%. | ||
The number of periods delay increases to 2. | The number of periods delay increases to 2. | ||
Revision as of 15:01, 14 January 2016
(DF).
1.
Strictly, the number less than one which we multiply a single 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 (or periodic cost of capital).
Example 1: Discount factor calculation
Periodic yield or 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: Increasing number of periods delay
Periodic yield or 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.
