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Discount Factor Calculator

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Introduction

The discount factor calculator will help you determine the discount factor, which is the number that when multiplied by a future cash flow, discounts it back to its present value.

How to use the discount factor calculator?

Using the Discount Factor Calculator, you can calculate the discount factor by inputting the discount rate and the period number.

The variables in the Discount Factor Calculator are:

Discount Rate (r)
The discount rate is the minimum expected return the investor expects to earn from the investment, given its risk profile.

You could also think of the discount rate as the percentage of return that the investor would receive for investing a dollar today. In other words, it is the rate of return the investor could earn in the marketplace for an investment of comparable size and risk.

Period Number (n)
The Nth period for which we want to calculate the discount factor.

Discount Factor
When we multiply the discount factor by the future value, we get the present value.

What is Discount Factor?

The discount factor represents a number that, when multiplied with a future cash flow, discounts it back to its present value.

The discount factor is primarily used in financial modeling to have more visibility of the present value of future cash flows.

Another way to think about the discount factor is what the value of receiving $1 at some point in the future would be today—the discount factor increases as the effect of the compounding increase over time.

How is Discount Factor Calculated?

The formula to calculate the discount factor is as follows

Discount Factor=1(1+r)n\text{Discount Factor} = \normalsize \dfrac{1}{(1+r)^{n}}

Where,

r → The discount rate

The appropriate rate for the investment given its risk profile

n → The Period Number

The Nth period for which we want to calculate the discount factor.

Example

Person A is about to receive $10,000 in three years, the rate of return that the investor could get in the market right now is 5%. What is the discount factor for 3rd year? What would be the Present Value of the $10,000 that A is about to receive in 3 years?

To get the discount factor we have to use the following formula.

Discount Factor=1(1+r)n=1(1+5%)3=0.8638\begin{aligned}\text{Discount Factor} &= \normalsize \dfrac{1}{(1+r)^{n}} \\[10pt]&= \normalsize \dfrac{1}{(1+5\%)^{3}} \\[10pt]&= 0.8638\end{aligned}

The present value of the 10,000 that person A is about to receive in three years is

PV=Discount Factornth Period×FVn=$10,000×0.8638=$8638.37\begin{aligned}\text{PV} &= \text{Discount Factor}_{\text{nth Period}} \times FV_{n} \\[10pt]&= \$10,000 \times 0.8638 \\[10pt]&= \$8638.37\end{aligned}
Author

hexacalculator design team

Our team blends expertise in mathematics, finance, engineering, physics, and statistics to create advanced, user-friendly calculators. We ensure accuracy, robustness, and simplicity, catering to professionals, students, and enthusiasts. Our diverse skills make complex calculations accessible and reliable for all users.

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