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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.
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