Definition
A discount factor converts future cash flows into present value using a chosen discount rate and time period.
Formula
Discount factor = 1 / (1 + r)^t
Example
At 10% over 3 years, the factor is 1 / 1.1^3 = 0.751.
How to use it
- Use a rate consistent with the risk of the cash flow stream.
- Apply the same timing convention across all line items.
Common mistakes
- Mixing mid-year and end-year conventions without adjustment.
- Using a nominal rate with real cash flows (or vice versa).
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Discount Factor" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., DCF valuation: forecast cash flows, discount rate, and terminal value) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Equity Value Calculator: Convert enterprise value (EV) into equity value using cash, debt, and other adjustments (optionally per share).
- Pre-money vs Post-money Valuation Calculator: Convert between pre-money and post-money valuation and estimate investor ownership from a financing round size.
- Pro Rata Investment Calculator: Estimate how much you need to invest in a new round to maintain your ownership percentage (simplified).
- Option Pool Shuffle Calculator: Estimate founder dilution impact when the option pool is increased to a target percent of post-money (simplified).
- SAFE Conversion Calculator: Estimate how a SAFE converts in a priced round using a valuation cap and/or discount (simplified).
Guides
- DCF valuation: forecast cash flows, discount rate, and terminal value: A practical guide to DCF valuation and WACC discount rate choices: how to forecast FCF, choose a discount rate, and avoid terminal value traps.