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The discounted value of a cash flow is determined by reducing its value by the current 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 net 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.

For example: You want to find the net present value of $100 that will be received in five years time. What is it worth now? What amount of money, if you let it grow at the discount rate, would equal $100 in five years?

We will assume a 12% per year discount rate.

NPV = 100 dollars divided by 1 plus 12% divided by 1 plus 12%, etc.

Since 1.12⁵ is about 1.762, the net present value is about $56.74.

The discount rate used in financial calculations is usually chosen to be equal to the cost of capital. Some adjustment may be made to the discount rate to take account of risks associated with uncertain cashflows.

The discount factor', P(T), is the number by which a future cash flow to be received at time T must be multiplied in order to obtain the current present value. Thus for a fixed annually compounded discount rate r we have

For a fixed continuously compounded discout rate r we have

For discounts in marketing, see discounts and allowances, sales promotion, and pricing.

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Discounted cash flowIn the field of finance, a discounted cash flow value of an investment (measured in terms of the cash you will put into and receive from it) adjusted for the time value of money. The future cash flows must be discounted in order to express their present v DiscountIn finance, discounting is the process of finding the current value of an amount of cash at some future date, and along with compounding cash form the basis of time value of money calculations. The discounted value of a cash flow is determined by reducing Discounts and allowancesDiscounts and allowances are modifications to the basic price. They could modify either the manufacturers list price (which is a price determined by the manufacturer and often printed on the package), the retail price (which is set by the retailer and oft Discount storeA discount store is a retail store offering a wide range of products, many branded, at discounted prices. They are not Pound or Dollar Stores, which do not normally offer as many branded items. Discount rateDiscount Rate 1. The interest rate that an eligible depository institution (such as a bank) is charged to borrow short term funds directly from the central bank. This is also known as the base rate as a profit-making bank will need to charge rates higher