Economics Time Value Of Money Questions
The concept of discount factor period refers to the adjustment made to future cash flows to account for the time value of money. It is used to determine the present value of future cash flows by discounting them back to their present value.
The calculation of the discount factor period involves using the formula:
Discount Factor = 1 / (1 + r)^n
Where:
- "r" represents the discount rate or the rate of return required by an investor.
- "n" represents the number of periods or the length of time until the future cash flow is received.
By applying this formula, the discount factor period is calculated, which is then multiplied by the future cash flow to determine its present value. The discount factor period decreases as the number of periods increases, reflecting the diminishing value of money over time.