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A positive number (usually designated as "
") showing how future cash value
in
unit time
(usually 1 year) is related to the present cash value
:
| LaTeX Math Block |
|---|
|
F = P \cdot (1+r)^t |
In other words it's equivalent to the interest rate in unit time
which can be potentially returned on the initial investment of cash .
The word "discount" means that a cash flow today is more valuable than identical cash flow in future because a present cash can be invested immediately and begin earning returns at rate , while a future flow cannot.
The value of discount rate is set by the corporate investment policy but usually related to the market-determined Weighted Average Cost of Capital
