Discount
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(Redirected from Discounts)
See also: Discounts and allowances
For the band of the same name, see Discount (band).
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.
To calculate the present value of a single cash flow, it is 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.
As an example, suppose an individual wants to find the present value of $100 that will be received in five years time. There is a question of how much is it worth presently, and what amount of money, if one lets it grow at the discount rate, would equal $100 in five years.
Let one assume a 12% per year interest rate.
PV = 100 dollars divided by 1 plus 12% (0.12) to the power 5
Since 1.125 is about 1.762, the present value is about $56.74.
