Discounting is the mathematical operation of converting future cash flows or values into their present equivalent, by dividing them by a factor that reflects the time value of money and the associated risk. It is the core mechanism of all intrinsic valuation methods — DCF, dividend discount model, excess earnings — and of any calculation requiring the present value of future obligations (pension liabilities, lease commitments, contingent payments). The discount factor is 1/(1+r)^n, where r is the discount rate and n the number of periods. The higher the discount rate or the longer the time horizon, the lower the present value of future amounts.

‍

Example: a company expects to receive CHF 5.0 million in 5 years under an earn-out arrangement. Discounted at a rate of 8.0% (reflecting the risk that the earn-out condition may not be met), the present value at closing is CHF 5.0 / (1.08)^5 = CHF 3.40 million — the amount recognised as part of the acquisition price in the IFRS 3 purchase price allocation.

‍

At Hectelion, discounting is applied rigorously in every valuation context — from DCF models to earn-out present value calculations and pension liability assessments.