# How to calculate the discount factor

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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.

- A discount factor takes a future sum of money and calculates what the money is worth presently.
- To calculate the factor, a person just needs the interest rate per period and the number of periods.

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.

- Add 1 to the interest per period.
- In our example, 1 divided by 1.1236 equals 0.8899.

References

Writer Bio

Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.