Everything about Discount totally explained
In
finance and
economics,
discounting is the process of finding the present value of an amount of cash at some future date, and along with compounding cash forms the basis of
time value of money calculations. The discounted value of a
cash flow is determined by reducing its value by the appropriate
discount rate for each unit of time between the time when the cashflow is to be valued to the time of the cash flow. Most often the discount rate is expressed as an annual rate.
Example
To calculate the
present value of a single cash flow, it's divided by one plus the interest rate for each period of time that will pass. This is expressed mathematically as raising the divisor to the power of the number of units of time.
Consider the task to find the
present value PV of $100 that will be received in five years. The question is what the present value of this future transaction is. Or equivalently, which amount of money will grow to $100 in five years when subject to a constant discount rate?
Assuming a 12% per year interest rate it follows
»
Other discounts
For
discounts in
marketing, see
discounts and allowances,
sales promotion, and
pricing.
Further Information
Get more info on 'Discount'.
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