Talk:Discounting

WHAT IS EXACTLY THE ANTONYM OF DISCOUNT?

Discounting is basically reverting the cash flow with a certain rate of interest so that it gives present value of the future cash flow.

-Mayank Gangwal

Cash flows and utility

As written this article privileges cash flows over utility flows. However, cash flows are only an example of utility flows: in general, for firms, we assume that utility = profit. Any comments, or should I go ahead and change the article? Tobacman 02:20, 8 December 2006 (UTC)

bad debts ladger

Under which ladger bad debts entry can be enterred

A "Discount" is a "Charge" paid by someone who wants to delay payment

A "Discount" is a "Charge" that is paid to obtain the right to delay a payment. Essentially, the payer purchases the right to make a given payment in the future instead of in the Present. The "Discount", or "Charge" that must be paid to delay the payment, is simply the difference between what the payment amount would be if it were paid in the present and what the payment amount would be paid if it were paid in the future.

A "Discount Rate" is the rate at which the "Discount" must increase in order to obtain the right to increase the amount of time the payment is delayed. Usually, it is thought that every additional delay is increasingly onerous. As a result, to obtain the right to extend the delay in payment, the increase in the "Discount" must be greater than the increase in the Delay. Therefore, the "Discount Rate" is used to show rate at which the rise in the "Discount" is compounded as the time period associated with the delay in the payment is extended.

Since economic models assume a person can earn a return on money by investing it, the "Discount Rate" is usually considered to be the same as the rate of return the person could receive on invested money. Since an investor earns a return not only on the original principle investment, but also on the earnings made thus far from the original investment, earnings are compounded as time moves forward into the future. Hence, this is usually the justification for having the "Discount" compounded as the time before payment can be received is extended. Simply put:

Investing $P in the Present will yield a profit of $P*(1+r)^t - $P after t time periods (r is the Rate of Return on the investment). As a result, a person must pay a "Discount" of $P*(1+r)^t - $P to obtain the right to delay making a payment to this investor for t periods. Hence, borrowing $P for t periods means the borrower will need to pay the lender $P*(1+r)^t after t time periods to obtain the loan.

Hence, We can also say that $p is the Discounted future payment of $F if $p=$F/(1+r)^t

Could you comment on this? I believe that this is a better explanation of what a Discount is. Thanks.

Please Note that "Discounting" may be different from the "Discount". "Discounting" is a calculation process, where as the "Discount" is the result obtained from the "Discounting" process. Mgmwki (talk) 21:46, 5 November 2008 (UTC)mgmWiki 15:45, 5 Novembr 2008 (UTC) —Preceding unsigned comment added by Mgmwki (talk • contribs)

A "Discount" is a "Charge" that is paid to obtain the right to delay a payment. Essentially, the payer purchases the right to make a given payment in the future instead of in the Present. The "Discount", or "Charge" that must be paid to delay the payment, is simply the difference between what the payment amount would be if it were paid in the present and what the payment amount would be paid if it were paid in the future.

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I have not seen this terminology previously, it may be an accounting term to better reflect P&L adjustments. In banking, the 'right' for a future payment looks like a loan to me. A 'right' is fundamentally a future contract. Such a contract may be priced at par such that reflects the consensus market value of future cash, or with a margin or premium added to earn a profit or account for risk. I suggest the 'charge' as referred to above is commonly called interest - the difference between the absolute total today and in future. The excess over the market rate is 'margin' or 'premium'. I believe the issue here is a crossover between context of accounting and banking/finance usage and thus there is a lot of confusion. I would happily reorganise this page, and clarify the banking context but don't want to tread on anyone's toes

Edmaher (talk) 12:38, 20 January 2011 (UTC)

A "Discount Rate" is the rate at which the "Discount" must increase in order to obtain the right to increase the amount of time the payment is delayed. Usually, it is thought that every additional delay is increasingly onerous. As a result, to obtain the right to extend the delay in payment, the "Discount" must rise faster the length of the Delay. Usually, the "Discount" for any delay is shown by compounding the its growth over time by the "Discount Rate"

Since economic models assume a person can earn a return on money by investing it, the "Discount Rate" is usually considered to be the same as the rate of return the person could receive on invested money. Since an investor earns a return not only on the original principle investment, but also on the earnings made from the original investment, earnings are compounded as time moves forward into the future. Hence, this is usually the justification for having the "Discount" compounded as the time before payment can be received is extended.

Grammer Considerations. Mgmontini (talk) 03:43, 14 November 2008 (UTC)

I will update the page since I see no comments. —Preceding unsigned comment added by Mgmwki (talk • contribs) 21:13, 5 December 2008 (UTC)

Separate risk-free vs Speculative, also definition seems incorrect

The page confuses the PV of the cashflow/value as determined by the available market deposit 'risk free' rates with the rates as may be applied to value "speculative" future cashflows, which include factors that are risk-related.

Suggest that the principle is separated from the specific cases or types of discounting, and that sections differentiate between risk-free/investment discounting and speculative discounting The former is applied in different cases to the latter

I am sure there are many pages that can explain the details of each principle.

With regards to the definition, it seems odd to define discounting in terms of a right. "obtains the right to delay payments" This right sounds like a loan or forward contract.

Discounting is defined as "To deduct or subtract from a cost or price." Thus in this context it is to ADJUST the cost/price/value of a future cost/price/value to reflect the present value of that future cost/price/value and this therefore accounts for the possibility that $1 today has greater value than $1 tomorrow

The term relates to the Adjustment process alone, not the right to delay payment — Preceding unsigned comment added by Edmaher (talk • contribs) 12:12, 20 January 2011 (UTC)