Question

calculate discounting factor for 10% at fifth year​

Answer 1

Answer:

You can create a discount factor template or table in Excel to work out these calculations, by entering the formula above with your own figures. For example, a table might look like this:

B

C

D

E

F

2

Period

1

2

3

4

3

Undiscounted Cash Flow

£100,000

£100,000

£100,000

£100,000

4

Discount Factor Formula

=1/1*(1+£C£4)^C2)

=1/1*(1+£C£4)^D2)

=1/1*(1+£C£4)^E2)

=1/1*(1+£C£4)^F2)

5

Discount Factor

0.93

0.86

0.79

0.74

This shows the decreasing discount factor over time, whether it’s an annual discount factor or a shorter time frame to reflect your accounting period.

For example, to calculate discount factor for a cash flow one year in the future, you could simply divide 1 by the interest rate plus 1. For an interest rate of 5%, the discount factor would be 1 divided by 1.05, or 95%.

Once you have your discount factor and discount rate calculated, you can then use them to determine an investment’s net present value. Add together the present value of all positive cash flows, subtracting the present value of negative cash flows. Applying the interest rate, you’ll end up with the net present value. There are many discount factor calculators that will apply these formulas, or you can use Excel for an analysis.

Discount factor benefits

Understanding the discount factor is helpful as it gives a visual representation of the impacts of compounding over time. This helps calculate discounted cash flow. As the discount rate grows over time, the cash flow decreases, making it a way to represent the time value of money in a decimal representation. Overall, investors can use this type of discount factor template to translate future investment returns into net present value.

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Answer 2

Answer:

The discount factor for 10% in the 5th year will be 0.62.

Explanation:

Discount Factor:- The discount aspect is a component using which future cash flow is multiplied to discount it back to the prevailing fee.

Given:-

Discounting Rate = 10%

Period time = 5th year,

Now, we have to use the Discount Factor Formula,

i.e., Discount Factor = $1 / (1 \times (1 + Discount Rate)^{Period Number} )$,

Step 1:- According to the formula we can write,

⇒ Discount Factor = $\frac{1}{ (1 \times (1 + Discount Rate)^{Period Number} )}$

⇒ Discount Factor = $\frac{1}{ (1 \times (1 + 10\%)^{5} )}$

⇒ Discount Factor = $\frac{1}{ 1.61051 }$

⇒ Discount Factor = 0.62

∴ The discount factor for 10% in the 5th year will be 0.62.

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