Discount factor, a crucial concept in finance and economics, refers to a multiplier used to determine the present value of future cash flows. For instance, if you anticipate receiving $100 in a year, and the discount factor is 0.9, the present value of that future cash flow is $90 ($100 x 0.9).
Calculating the value of a discount factor is of paramount importance for decision-making in various financial scenarios. It aids in project evaluation, investment analysis, and determining the current value of future earnings. The concept originated in the 18th century, with the introduction of compound interest calculations, and has since become an integral part of financial theory and practice.