Discount Factor
Discount Factor
The present value of one unit of currency received n years from now at rate k. Multiply any future cash flow by its discount factor to get its value today.
When to use: Use to build discount-factor tables, to discount a set of cash flows at once, or to read off how much a dollar in n years is worth today.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| DF | Discount Factor | Present value of 1 received in n years | factor |
| k | Interest Rate | Nominal annual interest rate as a decimal | % |
| n | Number of Years | Investment time horizon in years | years |
Real-Life Examples
Example 1: Ten Years at 6%
What is a dollar received in 10 years worth today at 6%?
Given
Step-by-Step
A dollar ten years out is worth about 56 cents today at 6%. A $100,000 payment in 10 years is worth $55,839.
Example 2: Five Years at 10%
Discount factor for 5 years at 10%.
Given
Step-by-Step
At 10%, five years knocks nearly 38% off a future payment's value.
Frequently Asked Questions
Present value is the future amount times its discount factor. The factor isolates the time-and-rate part of the calculation so it can be reused across many cash flows.
Because money today can be invested to grow, a future dollar is worth less than a dollar now, and the gap widens with time and with the rate.