CA Foundation · Business Economics · Nature and Scope of Business Economics
Iyer Traders has the option to receive ₹1,10,000 one year from now or a smaller amount today. The market interest rate is 10% per annum. Applying the discounting principle, what is the minimum amount Iyer should accept today to be equally well off?
The minimum amount is ₹1,00,000. Under the discounting principle, a future sum is worth less today, so the present value equals ₹1,10,000 divided by 1.10. Subtracting 10% of the future sum would be the wrong method.
- A₹99,000
- B₹1,00,000Correct
- C₹1,21,000
- D₹1,10,000
Explanation
Present value = Future value / (1 + r) = 1,10,000 / 1.10 = ₹1,00,000. Check: 1,00,000 × 1.10 = 1,10,000. The figure ₹99,000 wrongly subtracts 10% of the future value instead of dividing by 1.10.
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