, for a defined period of time, Discounting Discounting is a financial mechanism in which a debtor obtains the right to delay payments to a creditor , for a defined period of time, in exchange for a charge or fee. Essentially , the party that owes money in the present purchases the right to delay the payment until some future date. The discount, or charge, is simply the difference between the original amount owed in the present and the amount that has to be paid in the future to settle the debt The discount is usually associated with a discount rate, which is also called the discount yield.. The discount yield is simply the proportional share of the initial amount owed (initial liability) that must be paid to delay payment for 1 year. Discount Yield  =  "Charge" to Delay Payment for 1 year  /  Debt Liability It is also the rate at which the amount owed must rise to delay payment for 1 year.

, and the debtor wants to delay the payment for t years, BASIC CALCULATION If we consider the value of the original payment presently due to be $P , and the debtor wants to delay the payment for t years, then an r% Market Rate of Return on a similar Investment Assets means the "Future Value" of $P is $P * (1 + r%)t  [2][5], and the "Discount" would be calculated as Discount = $P * (1+r%)t - $P   where r% is also the "Discount Yield". If $F is a payment that will be made t years in the future, then the "Present Value" of this Payment, also called the "Discounted Value" of the payment, is $P = $F / (1+r%)t   

The Cost of Capital, in a financial market equilibrium, Discount rate The discount rate which is used in financial calculations is usually chosen to be equal to the Cost of Capital. The Cost of Capital, in a financial market equilibrium, will be the same as the Market Rate of Return on the financial asset mixture the firm uses to finance capital investment. Some adjustment may be made to the discount rate to take account of risks associated with uncertain cash flows, with other developments. The discount rates typically applied to different types of companies show significant differences: Startups seeking money: 50 – 100 % Early Startups: 40 – 60 % Late Startups: 30 – 50% Mature Companies: 10 – 25% Reason for high discount rates for startups: Reduced marketability of ownerships because stocks are not traded publicly. Limited number of investors willing to invest. Startups face high risks. Over optimistic forecasts by enthusiastic founders. One method that looks into a correct discount rate is the capital asset pricing model. This model takes in account three variables that make up the discount rate: 1. Risk Free Rate: The percentage of return generated by investing in risk free securities such as government bonds. 2. Beta: The measurement of how a company’s stock price reacts to a change in the market. A beta higher than 1 means that a change in share price is exaggerated compared to the rest of shares in the same market . A beta less than 1 means that the share is stable and not very responsive to changes in the market. Less than 0 means that a share is moving in the opposite of the market change. 3. Equity Market Risk Premium: The return on investment that investors require above the risk free rate. Discount rate= risk free rate + beta*(equity market risk premium)

The discount factor, P(T), is the factor by which a future cash flow must be multiplied in order to obtain the present value . For a fixed discount rate, discretely compounded over time, For a fixed continuously compounded discount rate, we have

Discounts and allowances Discounts and allowances are reductions to a basic price of goods or services. They can occur anywhere in the distribution channel, modifying either the manufacturer's list price (determined by the manufacturer and often printed on the package), the retail price (set by the retailer and often attached to the product with a sticker), or the list price (which is quoted to a potential buyer, usually in written form). There are many purposes for discounting, including; to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage distribution channel members to perform a function , or to otherwise reward behaviors that benefit the discount issuer. Some discounts and allowances are forms of sales promotion.

Discount and allowance types The most common types of discounts and allowances are listed below. Discounts and allowances dealing with payment Prompt payment discount Trade Discount:Deduction in price given by the wholesaler/manufacturer to the retailer at the list price or catalogue price. Cash Discount:Reduction in price give the creditor to the debtor is known as cash discount. This discount is intended to speed payment and thereby provide liquidity to the firm. They are sometimes used as a promotional device. ] Preferred payment method discount Some retailers (particularly small retailers with low margins) offer discounts to customers paying with cash, to avoid paying fees on credit card transactions

Forward dating Seasonal discount This is where the purchaser doesn’t pay for the goods until well after they arrive. The date on the invoice is moved forward example: purchase goods in November for sale during the December holiday season , but the payment date on the invoice is January 7. Seasonal discount These are price reductions given when an order is placed in a slack period (example: purchasing skis in April in the northern hemisphere, or in September in the southern hemisphere). On a shorter time scale, a happy hour may fall in this category. Generally, this discount is referred to as "X-Dating" or "Ex-Dating". An example of X-Dating would be: 3/7 net 30 extra 10 - this means the buyer must pay within 30 days of the invoice date, but will receive a 3% discount if they pay within 7 days after the end of the month indicated on the invoice date plus an extra 10 days.

Trade-in discount Trade rate discount This can be a way of reducing the price. By offering more for a trade-in than it is actually worth, the net effect is to reduce the effective price earned by the seller. The advantage of this is it encourages replacement sales without altering the list price or the perceived value. Trade rate discount A discount offered by a seller to a buyer in a related industry. For example, a pharmacist might offer a discount for over-the-counter drugs to physicians who are purchasing them for dispensing to the physicians' own patients.

Discounts and allowances dealing with quantity These are price reductions given for large purchases. The rationale behind them is to obtain economies of scale and pass some (or all) of these savings on to the customer. In some industries, buyer groups and co-ops have formed to take advantage of these discounts. Generally there are two types: Cumulative quantity discount (also called accumulation discounts) These are price reductions based on the quantity purchased over a set period of time. The expectation is that they will impose an implied switching cost and thereby bond the purchaser to the seller.

the company to work for the company to receive the discount, Employee discount A discount offered internally to the employees of a company that sell goods and/or services. This is used to entice more people interested in the goods and/or services of the company to work for the company to receive the discount, and then for the hired employees to put their wages right back into the company by purchasing the goods and/or services. Other perceived benefits of this discount include: reaching out to potential employees that could be knowledgeable in the goods and/or services the company offers by offering a discount on what they like. reduce employee theft by making the hired employees feel they are already getting the items at a great price. keep current employees from leaving if they cannot also leave the discount they are receiving behind. In 2005, the American automakers marketed an employee discount for all promotional campaign in order to entice buyers, which saw some success.