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Definition: Discounting

A firm receives and pays money at various points of time. It is not appropriate to compare these cash flows directly. So, the future cash flows are multiplied to an appropriate discount rate to arrive at a present value to make the comparisons possible.

The formula is Present value = Future value

                                                              (1 + Discount rate) n

Here ‘n‘ is the time period.

Example the value of an outflow of Rs. 1000 after 1 year discounted at the rate of 10% is  909 Rs.

I.e. 1000/ (1.1)1

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