# Discounting principle

Discounting principle explains about the comparison of money value in present and future time.

Example:

• If person is given option to take 100/- as a gift for today.

or

• If person is given option to take 100/- as a gift after one month.

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

### Application of discounting principle in business:

Example 1:

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

Example 2:

We commonly see bank and postal departments adverting that they will give 12% interest for every year on bank deposits what we have invested with them. With this 12% interest for one year, if we want to get 1-lakh rupees after one year, how much we should deposit at present? This question is answered by discounting principle.

In the future if we want to earn 100000/- how much we should invest at present. Example in the bank (100/- @ 12% interest rate of one year)

In this case we should invest at present 92.59 @ 8% interest for one year to get 100/- for the next year.

How to estimate the purchasing value of the Rupee