Discount factor - Financial definition
Concise definition of the term discount factor
The discount factor is the factor by which a future cash flow has to be multiplied in order to obtain its present value.
Comprehensive definition of the term discount factor
The discount factor is calculated a function of the time period and the discount rate. It is calculated using the following formula:
\[ PV_{f}=\frac{1}{\left ( 1 + i \right )^{n}} \]
Point on the formula to see its legend
Let's take for example a payment of $1 to be received 3 years into the future, where the annual discount rate is 2%.
Using the formula above, the discount factor would be 1 / (1 + 0.02)3 = 0.9423.
Using the formula above, the discount factor would be 1 / (1 + 0.02)3 = 0.9423.