is the process of finding the present value of an amount of cash
at some future date, and along with compounding cash forms the
basis of time value of money calculations. The discounted value
of a cash flow is determined by reducing its value by the
appropriate discount rate for each unit of time between the time
when the cashflow is to be valued to the time of the cash flow.
Most often the discount rate is expressed as an annual rate. To
calculate the present value of a single cash flow, it is divided
by one plus the interest rate for each period of time that will
pass. This is expressed mathematically as raising the divisor to
the power of the number of units of time. Consider the task to
find the present value PV of $100 that will be received in five
years. Or equivalently, which amount of money today will grow to
$100 in five years when subject to a constant discount rate?
Assuming a 12% per year interest rate it follows The discount
rate which is used in financial calculations is usually chosen
to be equ