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

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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.

raja
Published on 26-Sep-2020 12:27:57
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