Discount Period

In a discounted cash flow analysis, each cash flow is discounted according to how far in the future it arrives. The discount period is the number used as the exponent in the discounting calculation.

For example, using end-of-year discounting, a cash flow received at the end of year three has a discount period of 3. At a 10% discount rate, it is multiplied by 1 divided by 1.10 to the power of 3, about 0.751.

The discount period changes with the assumptions used. Under the mid-year convention, the year-three cash flow has a discount period of 2.5. If the valuation includes a stub period, all discount periods shift by the length of that stub.

Getting discount periods right matters, especially for long-dated cash flows and the terminal value. A mistake of half a year in the discount period applied to a large terminal value can change a valuation noticeably. Spreadsheet models usually include a dedicated row showing the discount period for each forecast year to keep the calculations transparent.