1. What is Discount Factor?

The discount factor is a financial calculation that determines the present value of money to be received in the future. It accounts for the time value of money, reflecting how money available now is worth more than the same amount in the future.

2. How Does the Calculator Work?

The calculator uses the discount factor formula:

Where:

• \( r \) — Discount rate (expressed as decimal, e.g., 5% = 0.05)
• \( n \) — Number of periods (years, months, etc.)

Explanation: The formula shows how much 1 unit of currency in the future is worth in today's terms, considering the discount rate over the specified periods.

3. Importance of Discount Factor

Details: Discount factors are essential in financial analysis, investment appraisal, and capital budgeting. They help compare cash flows at different times by converting future amounts to present values.

4. Using the Calculator

Tips: Enter the discount rate as a decimal (e.g., 0.05 for 5%) and the number of periods. Both values must be positive (rate ≥ 0, periods ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between discount rate and discount factor?
A: The discount rate is the interest rate used, while the discount factor is the calculated multiplier that converts future values to present values.

Q2: How does compounding frequency affect the calculation?
A: For different compounding frequencies, adjust the rate (divide annual rate by periods per year) and periods (multiply years by periods per year).

Q3: What are typical discount rates used?
A: Rates vary by context: 3-5% for public projects, 8-12% for corporate investments, or higher for risky ventures.

Q4: Can discount factor be greater than 1?
A: No, discount factors are always ≤ 1, as future money is worth less than present money when the discount rate is positive.

Q5: How is this used in NPV calculations?
A: Each future cash flow is multiplied by its corresponding discount factor, then summed to get the net present value.