Financial management is a risky business - predictions of future performance are prone to the effects of an ever-changing economic environment. Discounting predicted cash flows is one method a financial manager can use to account for the risks associated with forecasting performance.
What does discounting mean?
What does discounting mean?
Discounting a cash flow is the term used to describe the process of adjusting the amount to take into account the time value of money.
To discount an amount, simply multiply by the time value factor, which can be determined using this formula: 1/(1+r)t. In this formula, r stands for the discount rate and t stands for the appropriate number of periods (usually number of years). The concept of discounting is closely related to the broad fields of financial risk management and capital budgeting.
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