Question

Select the best (most informative) answer. present value involves _____ whereas future value involves _____.

a. discounting, compounding

b. both are compounding

c. compounding, discounting

d. both are discounting

Answer 1

Present Value involves discounting, and future value involves compounding.

The find present value of a dollar a year from now, we must discount by the discount rate, since a dollar a year from now is not worth as much as a dollar today.

To find the future value (in a year) of a dollar we receive today, we increase the dollar by the discount rate, since our dollar today is worth more than a dollar a year from now.