Discounting Principle, Principle of Managerial Economics Assignment Help

Basic principles of managerial economics - Discounting Principle, Principle of Managerial Economics

Economics Help >> Managerial Economics >> Discounting Principle

Discounting principle states, when a decision affects costs & revenues at future gates, it is required to discount those costs & revenues to present values before a valid comparison of alternatives is possible. because money has time value, that is, a- rupee to be received in the future is not worth a rupee today. Thus, this is required to have techniques for measuring the value today (i.e., the present value) of rupee to be received or paid at different points in future. If the interest rate is .10 and if the rupee is to be received in 4 years (n = 4), the present value of rupee equals.


In words, the present value of the rupee is 68.3 paise. Similarly, we can estimate the present value for longer periods. Present value of an annuity for i.e. a series of periodic equal-payments can be regarded as the sum of the present values of each of several amounts. For i.e., the present value of Re. 1 to be received at the end of each of the next S\ears, if the interest rate is .10, is



=.90909 + .8264S + .75131 + .68301 + .62092 

= Rs 3.79 

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