Discounting is the process of determining the present value of a payment or a stream of payments that is to be received in the future. The discount rate is the interest rate used to discount the payment.Discounting is used in order to account for the time value of money. The time value of money is the idea that a dollar today is worth more than a dollar in the future. This is because a dollar today can be invested and will grow over time.The discount rate is the rate of return that could be earned if the money was invested. In order to calculate the present value of a future payment, the discount rate is applied to the payment.For example, if you are to receive a payment of $100 in one year, and the discount rate is 10%, the present value of the payment would be $100/(1+0.10) = $90.91. This means that if you were to invest the $100 today, you would have $90.91 in one year.Discounting is a useful tool in order to compare investment options. It can also be used in order to make decisions about when to consume a good or service.If you are considering whether or not to buy a good or service that will be consumed in the future, you can use discounting in order to calculate the present value of the good or service.
For example, if you are considering buying a car that will cost $10,000 in one year, and the discount rate is 10%, the present value of the car would be $10,000/(1+0.10) = $9,091.
