# Difference between compounding and discounting techniques in time value of money.

The major differences between compounding and discounting techniques in time value of money are as follows −

Compounding technique

• It is a process of calculating future value using present investment.

• It determines money gained by an investment.

• It is also called as present value.

• Compound interest rate.

• Uses future value/compounding factor.

• Its formula is Fv= Pv(1+r)^n

• Amount increases in this method.

• Right side to left (time line).

• If the rate is low then, future value will decrease and if the rate is high then, future value will increase.

Discounting technique

• It calculates future cash flows using present value.

• It determines the amount to be invested to get maximum future gains.

• It is also called future value.

• Discount rate.

• It uses present value/discounting factor.

• Its formula is Pv=Fv/((1+r)^n).

• Amount decreases in this method.

• Left to right side (time line).

• If the rate is low then, present value will increase, if rate is high then, present value will decrease.

Updated on: 26-Sep-2020

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