 Financial Terms Discounting

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# Definition of Discounting ## Discounting

Calculating the present value of a future amount. The process is opposite to compounding.

## Discounting

Calculating the present value of a future payment.

## Discounting

The process of calculating the present value of a stream of future
cash flows

## Discounting

The process of finding the present value of a series of future cash flows. discounting is the reverse of compounding.

## discounting

the process of reducing future cash flows to present value amounts

# Related Terms:

## Continuous Discounting

The process of calculating the present value of a stream of future
cash flows by discounting over a continuous period of time

## Discounting of Accounts Receivable

Short-term financing in which accounts receivable are used as collateral to secure a loan. The lender does not buy the accounts receivable but simply uses them as collateral for the loan. Also called pledging of accounts receivable.

## Discounted Cash Flow

Techniques for establishing the relative worth of a future investment by discounting (at a required rate of return) the expected net cash flows from the project. ## discounted cash flow (DCF)

Refers to a capital investment analysis technique
that discounts, or scales down, the future cash returns from an
investment based on the cost-of-capital rate for the business. In essence,
each future return is downsized to take into account the cost of capital
from the start of the investment until the future point in time when the
return is received. Present value (PV) is the amount resulting from discounting
the future returns. Present value is subtracted from the entry
cost of the investment to determine net present value (NPV). The net
present value is positive if the present value is more than the entry cost,
which signals that the investment would earn more than the cost-ofcapital
rate. If the entry cost is more than the present value, the net
present value is negative, which means that the investment would earn
less than the business’s cost-of-capital rate.

## Factoring

The discounting, or sale at a discount, of receivables on a nonrecourse, notification
basis. The purchaser of the accounts receivable, the factor, assumes full risk of collection and
credit losses, without recourse to the firms discounting the receivables. Customers are notified to
remit directly to the factor.

## present value (PV)

This amount is calculated by discounting the future
cash returns from a capital investment. The discount rate usually is the
cost-of-capital rate for the business. If PV is more than the initial amount
of capital that has to be invested, the investment is attractive. If less,
then better investment alternatives should be found.

## Present Value (PV)

The dollar value at the present time (year zero) of a single cash
flow or a stream of future cash flows. The present value is
calculated by discounting the future cash flows.

## risk-adjusted discount rate method

a formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk

## Settlement rate

The rate suggested in Financial Accounting Standard Board (FASB) 87 for discounting the
obligations of a pension plan. The rate at which the pension benefits could be effectively settled off the
pension plan wished to terminate its pension obligation.

## Spot rate

The current interest rate appropriate for discounting a cash flow of
some given maturity.

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