How To Calculate The Percentage Of Discount

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How To Calculate The Percentage Of Discount

How To Calculate The Percentage Of Discount

Calculating discounts is one of the most useful math skills you can learn. You can apply it to restaurant tips, store sales, and to set rates for your own services. The basic way to calculate a discount is to multiply the original price by a fractional percentage. To calculate the selling price of an item, subtract the discount from the original price. You can use a calculator to figure it out, or you can round up the price and estimate a discount to your fancy.

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How To Calculate The Percentage Of Discount

To calculate the discount, first convert the discount percentage to a decimal. Think of a percentage number with a decimal point to the right of the last digit, then move the decimal point two places to the left to convert. Then multiply the original price by the decimal, either manually or using a calculator. This will give you the discount amount, or the amount deducted from the original price. Then subtract the discounted amount from the original price to get the discounted price. If you want to learn how to quickly estimate the discounted price of an item, read on! (APV) Net Present Value (NPV) Compounding Illiquidity Discount

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How To Calculate The Percentage Of Discount

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The discount factor is used to calculate the value (present value or “PV”) of $1 received at some time in the future based on the implied receipt date and discount rate assumptions.

How To Calculate The Percentage Of Discount

The present value of the cash flows (that is, the value of future cash in today’s dollars) is calculated by multiplying the cash flows for each projected year by a discount factor determined by the discount rate and the corresponding period.

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In general, there are two ways of calculating the discount factor, but in both cases the discount factor is a function of:

How To Calculate The Percentage Of Discount

The discount rate can be thought of as representing the percentage return you might receive if you received that dollar investment today.

The reason you’d rather have $1 today than $1 three years from now is that if you get $1 three years from now, you’re going to lose three full years where you could have invested that $1, But you end up with a gain of more than $1. 1 is over at that time.

How To Calculate The Percentage Of Discount

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Any formula can be used in Excel; however, we’ll use the first formula in our examples because it’s a bit more convenient (ie, Excel rearranges the formula itself into the first formula).

To arrive at the present value using the first method, the factor is then multiplied by the cash flow to obtain the present value (“PV”).

How To Calculate The Percentage Of Discount

Although the discount rate remains constant over the forecast period, increasing the number of periods is responsible for the decrease of this factor over time.

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Note that the term can be arbitrarily long (years, months, days, even hours) – but it is crucial to ensure that the term matches the one implied by the discount rate.

How To Calculate The Percentage Of Discount

Intuitively, the discount factor (always calculated as 1 divided by the amount) reduces the cash flow. This is also related to what we discussed earlier, receiving a dollar today is more valuable than receiving a dollar in the future.

To link this to an example using $1, assume a discount rate of 10% and a time frame of one year – the discount factor is calculated as follows:

How To Calculate The Percentage Of Discount

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This example shows that $1 received one year from the current period is worth $0.91 today.

The formula for the second method is almost the same, except there is no minus sign in front of the period index.

How To Calculate The Percentage Of Discount

Unlike the first method, this time the present value formula divides the cash flows by the discount factor.

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As opposed to decreasing over time, the factor increases in this case – so the downward adjustment to present value becomes more pronounced in later years.

How To Calculate The Percentage Of Discount

Returning to the $1 example with the same 10% discount rate and one-year term, the calculation is:

So, as we can see, both methods calculate the same present value ($0.91) of $1 a year from now.

How To Calculate The Percentage Of Discount

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For example, in 2021, the discount rate is 0.91 after adding 1 to the discount rate of 10%, and then increasing the value to -1 index, which is the same period.

Then multiply 0.91 by the $100 cash flow to get $91 as the present value of the first year cash flow.

How To Calculate The Percentage Of Discount

At the end of year 5, we can see the discount factor value drop from 0.91 at the end of the forecast period to 0.62 due to the time value of money.

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Remember how this time the cash flow will be divided by the discount factor to get the present value.

How To Calculate The Percentage Of Discount

For 2021, add the 10% discount rate to 1, an index that raises to 1, since this is the first forecast year. By doing this, the output is 1.10.

On the other hand, in the second method, the factor increases over time because the cash flows are divided by the >1 factor.

How To Calculate The Percentage Of Discount

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Then divide the first year cash flow of $100 by 1.10 to get a cash flow PV of $91.

Here, in the final output table below, the present value results for the cash flows calculated by both methods are the same.

How To Calculate The Percentage Of Discount

Ultimately, it doesn’t matter which method you decide to use, because conceptually the logic and impact of the discount factor is exactly the same.

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How To Calculate The Percentage Of Discount

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Instant access to video courses taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps, and Excel shortcuts. Then go to the Home tab and use this “Percent Style” button to format the cell as a percentage. This will ensure that Excel displays the result as a percentage, including the percent sign.

How To Calculate The Percentage Of Discount

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Once the cells are formatted correctly, we type an equal sign and divide the discounted price in C3 by the original price in B3 (the price before the discount was applied).

When we press Enter, we get the first important result, which tells us that the discounted price (7€) is 70% of the original price of 10€.

How To Calculate The Percentage Of Discount

However, we are trying to calculate the discount, so we need to subtract this calculated value (70%) from 100%.

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So, here is the final formula that will help you calculate discount percentage quickly and easily.

How To Calculate The Percentage Of Discount

If the discounted price changes to 9 EUR, Excel automatically recalculates the discount percentage and displays 10% in the target cell.

The formula works with all numbers and you get the result instantly – it couldn’t be easier!

How To Calculate The Percentage Of Discount

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How To Calculate The Percentage Of Discount

This article was co-authored by Staff. Our trained team of editors and researchers verify articles for accuracy and completeness. s content management team carefully monitors the work of our editorial team to ensure that each article is backed by solid research and meets our high quality standards.

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How To Calculate The Percentage Of Discount

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