1. What is a Discount Factor?

The discount factor is a financial calculation that determines the present value of $1 to be received in the future. It's used in discounted cash flow (DCF) analysis to calculate net present value (NPV).

2. How Does the Calculator Work?

The calculator uses the discount factor formula:

Where:

• \( r \) — Discount rate per period (as decimal)
• \( n \) — Number of periods

Explanation: The formula accounts for the time value of money, showing how much less future money is worth compared to current money.

3. Importance of Discount Factor

Details: Discount factors are essential for investment appraisal, capital budgeting, and any financial analysis involving future cash flows. They help compare money across different time periods.

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 percentage used to discount future cash flows, while the discount factor is the actual multiplier applied to a future amount.

Q2: How does compounding period affect the calculation?
A: The discount rate (r) and periods (n) must match the compounding frequency (annual, quarterly, etc.) for accurate results.

Q3: What are typical discount rates used?
A: Common rates range from 3-12% depending on risk, with riskier projects using higher rates. The company's WACC is often used.

Q4: Can discount factors be greater than 1?
A: No, discount factors are always ≤1 since future money is worth less than or equal to present money.

Q5: How is this used in NPV calculations?
A: Each future cash flow is multiplied by its period's discount factor, then summed to get NPV.