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|Discount Factor (%)|
Cash flows are generated in every business, but will they be worth as much in the future as they are today? This can be said for cash flows in general as well. The concept of "time value of money" is the biggest factor when you calculate the discount factor for future cash flows to find out their present value. It is used for assessing the time value of money, and is referred to as the discount factor or discounting. Put simply, the value of money changes according to the time difference between present and future and it is created by discounting the future value back to the present value.
You can calculate the discount factor manually, it involves several steps and the calculations are rather complex, However, to avoid the manual calculations you can use the online calculator, let's take a look at both ways.
The discount factor calculates the present value of future cash flows. You can follow the below steps or calculate the discount factor manually:
The first step is to determine the discount rate, based on current market situation that is obtained on a similar kind of investment.
The second step is to decide on how long you want your money to be kept invested in order to get the returns.
Third step is to assume or find out the compounding period (explained below) by market information. This can be monthly, quarterly, or annually, etc.
Fourth step is to follow the below formula in order to find out the discount factor:
Let's discuss the components of the formula:
The other way to calculate the discount factor is by entering the above mentioned components into the Discount Factor Calculator created by iCalculator. Let's have a look at some benefits of using the discount factor calculator.
On the basis of your inputs, the calculator will provide you with the results instantly without having to do the manual calculations. The Discount factor calculator is online and saves you a lot of time.
The results obtained from the calculator are an indicator of how well your investments can do in the future. You can use the discount rate for comparing various plans offered by different investment agencies in order to get the best available plan.
The Discount factor is relevant in the calculation of other kinds of values and other financial models. Let's have a look at them.
The discount factor is used for assessing risk on investment. The higher the discount factor the higher the risk. This method captures the effects of compounding that is helpful in calculating:
Additionally, discount factor is used by insurance companies as well as for pension calculations for discounting the liabilities of the applicants.
This is also useful in the global financial market for unsecured promissory notes such as commercial paper and treasury bills. The time value of money is also particularly useful when paying tax bills. Delaying the payment of tax until the deadline technically means you pay less tax and the value of the money has decreased.
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