CS Executive · Corporate Accounting and Financial Management · Time Value of Money
In the context of time value of money, what does the process of discounting do?
Discounting converts a future sum into its equivalent present value by applying a discount rate. It is the reverse of compounding, which carries a present sum forward to a future value. It is used to compare cash flows occurring at different times.
- AConverts a future sum into its equivalent present valueCorrect
- BConverts a present sum into its future value
- CCalculates only simple interest on a sum
- DAdjusts a sum for tax payable on interest
Explanation
Discounting moves a future cash flow back to today using a discount rate, giving present value. Converting a present sum into a future value is compounding, the reverse process.
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