How to calculate the discount factor

Written by carter mcbride
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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.

Skill level:
Easy

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Instructions

  1. 1

    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.

  2. 2

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

  3. 3

    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.

  4. 4

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

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