Discount Factor
Discount Factor
\[DF = \frac{1}{(1+r)^t}\]
Variables
DF = discount factor
r = interest rate per period
t = number of periods
Description
What is this formula?
The discount factor formula calculates the present value multiplier used to convert a future amount of money into its current value.
When to use it
Use this formula when discounting future cash flows in financial analysis and investment evaluation.
Example
If the discount rate is 6% for 5 years:
DF = 1 / (1 + 0.06)^5 ≈ 0.7473
A future payment is therefore worth about 74.73% of its future value today.
Applications
Discounted cash flow analysis, bond valuation, investment analysis, and corporate finance.
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