Calculating the discount factor in net present value (NPV) is a crucial step in evaluating potential investments. The discount factor represents the present value of a future cash flow, taking into account the time value of money.
For instance, a company considering a project with a projected cash flow of $10,000 in five years, assuming a 5% discount rate, would calculate a discount factor of 0.7835. This factor would be multiplied by the $10,000 cash flow, resulting in a present value of $7,835.