Question

Discuss the notion that discounting is the reverse of compounding in TVM concepts. Provide illustrations. Please...

Discuss the notion that discounting is the reverse of compounding in TVM concepts. Provide illustrations.

Please provide illustration and detail answer.

Homework Answers

Answer #1

Yes, discounting is used for calculating the present value where as compounding is used for calculating future value in Time Value of Money Concept.

For example, if a person deposits $1000 at 10% interest for 5 years. The Future value has to be calculated using=$1000*(1+10%)^5

Here, (1+10%)^5 is the compounding factor which is equal to=1.61051

The Future value=$1000*1.61051=$1610.51

==> For example, if a person receives $1000 after 5 years, at 10%, what would be the present value today. Now we have to find the discounting factor which is equal to=1/(1+10%)^5=1/1.61051=0.62092

The present value=$1000*0.62092=$620.92

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