Discount Rate

The price of any total quantity that is usually less than the original value of the commodity is known as the discount rate. Based on the concept of profit and loss, the discount is just the difference between the market price of a commodity and the selling price of the commodity. Further clarifying marked price and selling price of the commodity for you:

1. Marked Price of the commodity – the price of the commodity set up by the seller based on market standards. 

2. Selling Price of the commodity – the price of the commodity at which it has been sold to the consumer. 

Note that when the selling price of the commodity is less than the market price of the commodity, then the consumer is said to have gotten the discount on the specific commodity that he has purchased.

What is Discount Rate?

The reduced price of any particular commodity or service is known as its discount rate. The discount rate of any commodity is mentioned separately on the pack of the commodity. There are many reasons for a seller to provide a discount on any commodity. Some of them are mentioned below:

1. To encourage the retail distributors of the commodity.

2. To clear out the old stock.

3. To reward some potential customers. 

4. To increase the sale of the commodity. 

So, the discount rate is basically a strategy used by the sellers to attract the customers towards the purchase of a particular commodity. It is the easiest way to increase the demand for the commodity, and further, the sales of the commodity also increase. 

Use of Discount Rate

The major use of the discount rate is to calculate the net present value of any firm. It is also utilized for the following purpose:

1. To represent the opportunity cost of a firm.

2. For the comparison between different investments.

3. Accounts for the time value of money.

4. It also accounts for the risk factor in an investment.

Types of Discount Rates

There are a few types of discount rates in corporate finance. Some of them are mentioned below:

1. Cost of Debt is used for calculating the fixed income security.

2. A risk-free rate is responsible for accounting the time value of money.

3. The cost of equity is used for calculating the equity of any particular firm. 

4. WACC is used to calculate the enterprise value of any firm.

5. A predefined hurdle rate is considered for investing in the internal corporate projects for any firm. 

How to Calculate Discount Rate

In mathematics, discount rate problems can be solved by using the simple discount rate formulas. 

Formula 1.

Discount = Marked price of commodity – selling price of commodity

D = MP - SP

Here, MP is the real or the actual price of the commodity.

Whereas, SP is the price of the commodity that the customer pays to the seller

And, D(discount) is the percentage of the marked price. 

Now, to calculate the discount rate, you will have to further solve the equation, 

Discount Rate = p x r 

Here, discount rate can be denoted by DR

Whereas, p is the principle amount of the commodity

And, r is the interest rate 

So, please note that in order to calculate the discount rate of any commodity you must first know the marked price of the commodity and the selling price of the commodity. 

Solved Example 

Q1. Anita purchased a notebook. The original price of the notebook was RS.200 and she purchased it at a discount of 10%. Calculate the discount rate of the notebook purchased by Anita. 

Ans1. Putting the values, 

Principle amount of the notebook = Rs.200

Interest rate = 10% 

Therefore, 

DR = P X R

Putting the values in the equation, 

DR = 200*10%

DR = 20 

So, the discount rate of the notebook is Rs20. 

Conclusion 

To calculate the discount rate of any commodity, you must either know the interest rate of the commodity directly given in the question. If the interest rate of a commodity is not given in the question, then you have to first calculate it with the help of the market price of the commodity and the selling price of the commodity given in the question and further solve the equation as explained above.