Discount rate - Revision history

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	[[Category:Done ~~2017~~-07-01]]		[[Category:Done 2026-08-01]]
	<onlyinclude>The discount rate is the interest rate ~~that~~ firms use to determine how much a future cash flow is worth in the present.~~</onlyinclude>~~ The practice of using the discount rate to evaluate cash flows is called [[discounting]]<ref>R. A. Brealey et al. ''Fundamentals of Corporate Finance''. Toronto: McGraw-Hill Ryerson, 2012, pp. 85.</ref><ref name=Rout_econ>"Routledge Dictionary of Economics", discount rate, published Routledge Press, 2013. Edited by Donald Rutherford Online version accessed [August 17th, 2017].</ref>		<onlyinclude>The discount rate is the interest rate firms use to determine how much a future cash flow is worth in the present.The practice of using the discount rate to evaluate cash flows is called [[discounting]].</onlyinclude><ref>R. A. Brealey et al. ''Fundamentals of Corporate Finance''. Toronto: McGraw-Hill Ryerson, 2012, pp. 85.</ref><ref name=Rout_econ>"Routledge Dictionary of Economics", discount rate, published Routledge Press, 2013. Edited by Donald Rutherford Online version accessed [August 17th, 2017].</ref>


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	==References==		==References==
	{{reflist}}		{{reflist}}
			[[Category: Uploaded]]

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	<onlyinclude>The discount rate is the interest rate that firms use to determine how much a future cash flow is worth in the present.</onlyinclude> The practice of using the discount rate to evaluate cash flows is called [[discounting]]<ref>R. A. Brealey et al. ''Fundamentals of Corporate Finance''. Toronto: McGraw-Hill Ryerson, 2012, pp. 85.</ref><ref>~~Investopedia.~~ "~~Discount Rate.~~" ~~[Online]~~, ~~Available: http://www~~.~~investopedia.com/terms/d/discountrate.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186~~ [~~Aug 30~~, ~~2016~~].</ref>		<onlyinclude>The discount rate is the interest rate that firms use to determine how much a future cash flow is worth in the present.</onlyinclude> The practice of using the discount rate to evaluate cash flows is called [[discounting]]<ref>R. A. Brealey et al. ''Fundamentals of Corporate Finance''. Toronto: McGraw-Hill Ryerson, 2012, pp. 85.</ref><ref name=Rout_econ>"Routledge Dictionary of Economics", discount rate, published Routledge Press, 2013. Edited by Donald Rutherford Online version accessed [August 17th, 2017].</ref>


	Using the discount rate, the calculation finds the '''present value''':		Using the discount rate, the calculation finds the '''present value''':


	::::::::Present value = <m>\frac{Future Value After -t- Periods}{(1+r)^{t}}</m>		::::::::Present value = <math>\frac{Future\ Value\ After\ t\ Periods}{(1+r)^{t}}</math>

	::::::::*''t'' = Period of time measured in years		::::::::*<math>t</math> = Period of time measured in years
	::::::::*''r'' = The discount rate (interest rate) expressed as a decimal		::::::::*<math>r</math> = The discount rate (interest rate) expressed as a decimal
	::::::::*The future value after the whole period of time (~~'''~~t~~'''~~)		::::::::*The future value after the whole period of time (<math>t</math>)

	If the future value after one year is $10,500 and the discount rate is 5% then:		If the future value after one year is $10,500 and the discount rate is 5% then:


	::::::::::::Present value = <m>\frac{10,500}{(1.05)^{1}}</m>		::::::::::::Present value = <math>\frac{10,500}{(1.05)^{1}}</math>


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	If a consumer wants to save their money to earn interest so they can buy a new TV in 2 years, then they can use the price of the TV ($2,500, assuming it does not change) and find out how much money they need to save at 7% interest:		If a consumer wants to save their money to earn interest so they can buy a new TV in 2 years, then they can use the price of the TV ($2,500, assuming it does not change) and find out how much money they need to save at 7% interest:

	::::::::::::Present value = <m>\frac{2,500}{(1.07)^{2}}</m>		::::::::::::Present value = <math>\frac{2,500}{(1.07)^{2}}</math>

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[[Category:Done 2016-04-30]]
<onlyinclude>The discount rate is the interest rate that firms use to determine how much a future cash flow is worth in the present.</onlyinclude> The practice of using the discount rate to evaluate cash flows is called [[discounting]]<ref>R. A. Brealey et al. ''Fundamentals of Corporate Finance''. Toronto: McGraw-Hill Ryerson, 2012, pp. 85.</ref><ref>Investopedia. "Discount Rate." [Online], Available: http://www.investopedia.com/terms/d/discountrate.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186 [Aug 30, 2016].</ref>

Using the discount rate, the calculation finds the '''present value''':

::::::::Present value = <m>\frac{Future Value After -t- Periods}{(1+r)^{t}}</m>

::::::::*''t'' = Period of time measured in years
::::::::*''r'' = The discount rate (interest rate) expressed as a decimal
::::::::*The future value after the whole period of time ('''t''')

If the future value after one year is $10,500 and the discount rate is 5% then:

::::::::::::Present value = <m>\frac{10,500}{(1.05)^{1}}</m>

::::::::::::'''Present value = $10,000'''

If a consumer wants to save their money to earn interest so they can buy a new TV in 2 years, then they can use the price of the TV ($2,500, assuming it does not change) and find out how much money they need to save at 7% interest:

::::::::::::Present value = <m>\frac{2,500}{(1.07)^{2}}</m>

::::::::::::'''Present value = $2,183.59'''

If they put $2,183.59 away at 7% interest over 2 years then they will have the right amount of money to buy the TV they want.

==See Also==
*[[Discounting]]
*[[Time value of money]]

==References==
{{reflist}}