# User Contributed Dictionary

### Verb

discounting- present participle of discount

# Extensive Definition

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 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.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

- =\frac=56.74 $.

## Discount rate

The discount rate which is 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, with other developments.The discount rates typically applied to different
types of companies show significant differences:

- Startups seeking money: 50 – 100 %
- Early Startups: 40 – 60 %
- Late Startups: 30 – 50%
- Mature Companies: 10 – 25%

Reason for high discount rates for
startups:

- Reduced marketability of ownerships because stocks are not traded publicly
- Limited number of investors willing to invest
- Startups face high risks
- Over optimistic forecasts by enthusiastic founders.

One method that looks into a correct discount
rate is the
capital asset pricing model. This model takes in account three
variables that make up the discount rate:

1. Risk Free Rate: The percentage of return
generated by investing in risk free securities such as government
bonds.

2. Beta: The measurement of how a company’s stock
price reacts to a change in the market. A beta higher than 1 means
that a change in share price is exaggerated compared to the rest of
shares in the same market. A beta less than 1 means that the share
is stable and not very responsive to changes in the market. Less
than 0 means that a share is moving in the opposite of the market
change.

3. Equity Market Risk Premium: The return on
investment that investors require above the risk free rate.

Discount rate= risk free rate + beta*(equity
market risk premium)

## Discount factor

The discount factor, P(T), is the number which a future cash flow, to be received at time T, must be multiplied by in order to obtain the current present value. Thus for a fixed annually compounded discount rate we have- P(T) = \frac

For fixed continuously compounded discount rate
we have

- P(T) = e^ \,

## Other discounts

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

## See also

### Lists

discounting in German: Abzinsung

discounting in Spanish: Descuento

discounting in French: Actualisation

discounting in Dutch: rente

discounting in Italian: sconto

discounting in Japanese: 割引

discounting in Chinese: 贴现

discounting in Polish: Dyskonto

discounting in Russian: Дисконтирование

discounting in Finnish: Diskonttaus

discounting in Swedish: Diskontera

discounting in Vietnamese: Chiết khấu

discounting in Ukrainian:
Дискаунт