What is discounting?

Tamara Sidorova
������������������������������������ ����������������������������������������Tamara Sidorova ������������������������������������
��������������������������������������������March 27, 2013
What is discounting?

One hundred rubles today, and one hundred rubles a year later, these are completely different things. By investing money today, we would like to receive a certain income tomorrow. To calculate it, you need a factor, and to calculate it, you first need to find out what discounting is. We will tell about it below.

Discounting

Discounting - bringing future profits (cash flows) to their present (current) value. In other words: discounting is the calculation of the value of money taking into account time factors, namely, how much the ruble spent today, in a year, will cost. This calculation will let you know if the expected returns are sufficient. After all, we want the profit to cover the following factors:

  1. Inflation.
  2. Risk factors.
  3. Higher return on other investments (deposit).

Example: we have 500 rubles, we invest them in some business, in time we plan to return 800 rubles. To invest or not? For a start, let's compare the estimated amount of income brought to today and the money available. For this we need a discount factor.The desired percentage of profit for the year 30%, we consider:

  • 100% + 30%: 100 = 1.3 (coefficient)
  • 800: 1.3 = 615.38 (rub)

Estimated income is greater than the amount received, which means that the project is profitable.

Discount rate

What is the discount rate? This is a percentage value that reflects the value of monetary units, taking into account risk factors and time. This is a variable that depends on many factors. For each company it is individual, but in the general case it will look like this:

  • i = f (i1, ..., in),

where i1�- the cost of an alternative investment for this period of time, in�- other factors (inflation and other risk factors). In principle, nothing complicated. And everyone can use these calculations.