How to calculate the discount factor

Written by carter mcbride | 13/05/2017
How to calculate the discount factor
Calculating discount factors. (calculator with coins #3 image by Adam Borkowski from Fotolia.com)

A discount factor takes a future sum of money and calculates what the money is worth presently. In business, this is known as the present value. To calculate the factor, a person just needs the interest rate per period and the number of periods. The formula is 1/(1+i)^t. For round figures, the Present Value of 60p table provides all the discount factors, so there is no need to perform the calculation.

Determine the interest per period. For example, if an investment pays 6 per cent per year for two years, then the interest rate per period is 6 per cent or .06.

Add 1 to the interest per period. In our example, 1 plus .06 equals 1.06.

Raise the number by the number of periods to calculate the discount factor. In our example, there are 12 periods (months). Therefore, 1.06 ^ 2 equals 1.1236.

Divide the number by 1. In our example, 1 divided by 1.1236 equals 0.8899.

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