Valuation Updated November 2026

Discount factor

The discount factor for year t at rate r is 1 / (1 + r)^t. Multiply a future cash flow by it to get present value. At 10%, the year 3 factor is 0.7513, so 500 received in three years is worth 375.66 today.

Syntax

DF_t = 1 / (1 + r)^t;  PV = CF_t x DF_t

Examples

Rate 10%, years 1, 2, 3
=1/(1+10%)^1, =1/(1+10%)^2, =1/(1+10%)^3

Result: 0.9091, 0.8264, 0.7513

PV of 500 in year 3 at 10%
=500 * 0.7513

Result: 375.66

Exactly 500 / 1.331.

Excel row formula with the rate in B1 and the year in row 3
=1/(1+$B$1)^C3

Result: copies across the forecast years

Common mistakes

Using a relative reference to the rate cell so the factor breaks when copied across; lock it with $B$1.
Counting the first forecast year as t = 0: cash flows at the end of the first year are discounted one full period.
Multiplying by (1 + r)^t instead of dividing, which compounds forward instead of discounting back.

Practice Discount factor

These drills check your answer on live data, free, no account needed.

Discount factors and present valuesFill the discount factor for each year (row 6: 1 divided by (1 + rate) to the power of the year), the present value of each cash flow (row 7) and the total present value in B8.
Mid-year convention switchCash usually arrives through the year, not on the last day. Add a switch: when B3 is 1, discount each year half a year less (year minus 0.5); when it is 0, use the full year. Fill the discount period (row 7), discount factor (row 8), present value (row 9) and the total in B10.

Questions

What is the difference between a discount factor and a discount rate?

The rate is the annual required return (10%). The factor is the multiplier that results for a given year (0.7513 for year 3 at 10%).

How do I compute a cumulative discount factor for a period?

Multiply the period factors, or divide the previous factor by (1 + r) each period. Both give 1 / (1 + r)^t for constant rates.

NPV in ExcelExcel NPV discounts every value one period, so the time zero investment goes outside the function: =NPV(rate, cash flows) + initial. Exact examples, errors.
Mid-year conventionThe mid-year convention discounts each year at t - 0.5 because cash arrives through the year. Formula, an Excel switch, effect on terminal value and examples.
DCF model stepsThe six steps of a DCF: forecast unlevered free cash flow, set WACC, compute terminal value, discount it all, bridge to equity value and divide by shares.
WACCWACC = E/V x cost of equity + D/V x cost of debt x (1 - tax rate). Cost of equity from CAPM, market value weights, an example giving 9.0% and common errors.