THE DISCOUNTING CONCEPT

This principle talks about comparison of the money value between present and future time. If a
decision affects costs and revenues at future dates, it is necessary to discount those costs and reven
to present values.

Eg:  1) 100/- is gifted to a particular person today.

        2) 100/- will be given as gift to same particular person after one year.

Normally a person chooses first offer only. Why because “today rupee is having more worth than
tomorrows rupee”

The formula of computing the present value is given below:

V = A/1+i

where:

V = Present value

A = Amount invested Rs. 100

i = Rate of interest 5 per cent

Similarly, the formula of computing present value at the end of 2 years:

V = A/ (1+i) 2
For n years V = A/ (1+i) n
n= no of years

Business application:

In the business, everybody prefers to do cash sale only rather than the credit sale and even they
ready to give cash discount for cash sale. The reason is we will get a rupee today and today’s rup
more valuable than the tomorrow’s rupee. But In credit sale we will get rupee tomorrow or in
future time and nobody give the discount for credit sale.
UTILISATION BY MANAGERS

The concept of discounting is used by managers and organizations in decision

problems pertaining to investment planning or capital budgeting.