Discounting represents determination of cost of future cash flows at the moment of time. The coefficient of discounting shows what size of money we will receive taking into account a factor of time and risks. By means of it we will transform future cost to cost at the moment.
It is required to you
- - calculator;
- - knowledge of financial management
Instruction
1. The coefficient of discounting is directly connected with factors of time and income. It is the indicator reflecting a ratio of future income to their current modern cost. This coefficient helps to define what has to be percent of increase in income to receive desirable result in the future. Allows to predict dynamics of cash flows.
2. This economic indicator is used in all financial spheres. It is applied to determination of cost efficiency of the project or activity of the concrete organization. Calculation of cost of capital investments and expenses for business plans also does not do without this coefficient. By means of it compare alternative options, define what of them less expensive regarding resources and use of money.
3. time or amount of the periods during which receiving income is planned.
4. The discount rate is the main component of coefficient of discounting. It represents the cost of the attracted capital. The expected profitability at which the investor is ready to make the investments in this project. A discount rate changeable size, it is influenced by numerous factors. In each separately considered case they are various.
5. When calculating as a rate the following options can be used: rate of inflation, profitability of the alternative project, credit cost, refunding rate weighted average cost of capital, desirable profitability of the project, expert assessment, percent on deposits, etc. The norm of discount is chosen directly the person which performs calculations for determination of the discounted cost.
6. Discounting coefficient always less than 1. It determines the quantity of one monetary unit in the future, at observance of conditions of calculation.