Angie · learn
Discount factor
How much a dollar arriving in year t is worth today, adjusted to mid-year because cash arrives through the year rather than all on 31 December.
Updated 2026-09-03
How it is calculated
Discount factor = 1 ÷ (1 + WACC)^t
The discount factor converts a dollar arriving in some future year into what that dollar is worth today. It is the mechanical heart of a DCF, and it is a single division.
discount factor = 1 ÷ (1 + WACC)^(t − 0.5)
Where t is the year number and wacc is the discount rate. The half-year subtraction is the mid-year convention, below.
The mid-year convention
The naive version discounts year one by a full year, which assumes every dollar of that year's cash arrives on 31 December. Businesses do not work that way. Cash arrives continuously, so on average it arrives mid-year, and discounting by half a year less is the closer approximation. It lifts a valuation by roughly half the discount rate, which on a 10 percent rate is about 5 percent.
Apple's factors on 2026-09-05 at a 10.59 percent WACC. By year five a dollar is worth 64 cents, which is why a high discount rate does most of its damage in the terminal value rather than in the early years.
See also
- Present value — What a future year's free cash flow is worth in today's money.
- WACC — Cost of equity and cost of debt blended by how much of each the company uses. This is the rate every future dollar is discounted at, and it is the single most leveraged input in the model.
- Discounted cash flow — Valuing a company by projecting the cash it will generate and discounting each year back to today. Everything Angie does is one long DCF.
Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.
