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The present value of $7,000 that will be received in a year, at a discount interest rate of 3% per year, is $6,796.12.
The current value, if the $7,000 is received after two years, is $6,598.17.
What is the rate of annual discount?
- The rate of return used in a discounted cash flow analysis to calculate the present value of future cash flows is called the annual discount rate.
- The total of all future cash flows (C) over a holding term (N) is discounted back to the present using a rate of return in an annual discounted cash flow analysis (r).
How is the annual discount rate determined?
Rate of Discount Formula
First, the present value is divided by the value of a future cash flow (FV) (PV) The amount that remains after the previous step is then increased to the reciprocal of the number of years (n) The discount rate is then calculated by deducting one from the value.
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