What is the discount factor? How would you calculate it?

Answer 1

The discount factor is the factor that you would multiply a future value by to determine what is its present value. I.E. You will receive $5,000 in five years and want to know how much that would be worth today assuming a 7% interest rate. The formula to calculate the discount factor is 1/(1+ interest rate)^n where n is the number of years. In this example the discount factor would be 1/(1+.07)^5 = ,7130. Therefore $5,000 received in five years at a 7% discount rate would be the equivalent of receiving $5,000 x .7130 = $3,564.93 today.