ES 312b – Engineering Economy 1st Sem S.Y.

2020-2021

PRINCIPLES OF TIME-MONEY RELATIONSHIP (PART 3)

Discount

Discount on a negotiable paper is the difference between the present worth PW (the
amount received for the paper in cash) and the worth of the paper at some time in the future
(the face value of the paper or principal). Discount is the interest paid in advanced.

𝑫𝒊𝒔𝒄𝒐𝒖𝒏𝒕 = 𝑭𝒖𝒕𝒖𝒓𝒆 𝒘𝒐𝒓𝒕𝒉 − 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝒘𝒐𝒓𝒕𝒉 equation 1

The rate of discount, d

The rate of the discount is the discount of one (1) unit principal for one (1) unit of time.

(1+i)-1

0 1

P1.00

Figure 1. Rate of discount

𝑑 = 1 − (1 + 𝑖)−1 equation 2
𝑑
𝑖 = 1−𝑑 equation 3

Where d = discount rate for the period involved

i = interest rate for the same period

Sample problem:

A man borrowed P5,000.00 from the bank and agreed to pay the loan at the end of 9
months. The bank discounted the loan and gave him P4,000.00 in cash. (a) What is the rate of
discount? (b) what was the rate of interest? (c) What was the rate of interest for 1 year?

Solution
P4,000.0
0

0 9 months

P5,000.0
0
𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑃5,000.00−𝑃4,000.00
(a) 𝑑 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 = 𝑃5,000.00
= 0.20 𝑜𝑟 20%

Engr. Alvin John R. Villanueva

1
ES 312b – Engineering Economy 1st Sem S.Y. 2020-2021

𝑑 0.2
(b) 𝑖 = 1−𝑑 = 1−0.2 = 0.25 𝑜𝑟 25%

𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 1,000.00
Or 𝑖 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑤𝑜𝑟𝑡ℎ = 4,000.00 = 0.25 0𝑟 25%

(c) 𝐼 = 𝑃𝑖𝑛
𝐼
𝑖=
𝑃𝑛
1,000.0
𝑖=
9𝑚𝑜
4,000 (12𝑚𝑜)
𝑖 = 0.333333 𝑜𝑟 33.33%

Engr. Alvin John R. Villanueva

2