When solving for future value,we use the term compounding of cash flows rather than the term discounting of cash flows.

Question

Quizplus · Accepted Answer

Compounding of cash flows refers to the process of earning interest on both the principal amount and the interest earned in previous periods. This results in the future value of a cash flow being larger than the present value. Discounting of cash flows, on the other hand, refers to the process of determining the present value of future cash flows by discounting them back to their current value using a discount rate. Therefore, when solving for the future value, we use compounding and not discounting.

When Solving for Future Value,we Use the Term Compounding of Cash