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Investment appraisal techniques

Discounting

Discounting performs the opposite function to compounding: it considers
a sum receivable in the future and establishes its equivalent value today.
This value, in today’s terms, is known as the Present Value (PV).

PV = Future Value × Discount Factor (DF)

1
Where DF = , or DF = (1 + r) –n
(1 + r) n

–n
(1 + r) can be looked up in discounting tables
r = interest rate (expressed as a decimal)

n = number of time periods

Illustrations and further practice

Now read illustration ‘Discounting’ and examples 2 and 3 from Chapter 10.

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