Definition for : Discounting

Discounting is the calculation of the Present value of a Future sum. Discounting is thus the inverse to Capitalisation. Discounting makes it possible to compare sums received or paid out at different dates. Discounting is calculated with the Required rate of return of the investor. The discounting formula runs as follows: V0 = Vn / (1 + k)n, where Vn is the Future Cash flow, V0 - the initial Investment, t – Discount rate, n – Duration of the Investment.

(See Chapter 16 The time value of money and net present value of the Vernimmen)

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