Question

Given below are two statements:
Statement (A): The method which helps to compare the present worth of the future revenue with the present investments is known as compounding.
Statement (B): A process by which the present costs are made to grow with time to make it comparable with the future returns is known as discounting.
In light of the above statements, choose the correct answer from the options given below:

• A. Both Statement (A) and Statement (B) are correct.
• B. Both Statement (A) and (B) are incorrect.
• C. Statement (A) is correct but Statement (B) is incorrect.
• D. Statement (A) is incorrect but Statement (B) is correct.

Hint:

Compounding grows present to future (FV); Discounting reduces future to present (PV).

Answer 1

The Correct Option is D

- Statement (A) is incorrect: Compounding is the process of calculating the future value of a present amount by adding interest over time (e.g., \( FV = PV \cdot (1 + r)^n \)). It does not compare the present worth of future revenue with present investments. Instead, {discounting is the method that calculates the present value of future cash flows to compare with current investments (e.g., \( PV = \frac{FV{(1 + r)^n \)).
- Statement (B) is incorrect: Discounting is the process of determining the present value of future cash flows, it does not represent the cost of growth from present to future. Instead, {compounding calculates how present costs or investments grow over time to future values, making them comparable to future returns. Since Statement (A) and Statement (B) confuses compounding with discounting and vice versa, option (2) is correct.