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ch 4 When solving for future value, we use the term compounding of cash flows rather than the term discounting of cash flows OTrue Ofalse

Ask by Mitchell Bolton. in the United States
Jan 30,2025

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When finding the future value of cash flows, we use compounding, not discounting.

Solution

**True.** When solving for the future value of cash flows, the process involves **compounding**, which means calculating how present cash flows will grow over time with interest. Compounding takes into account the interest earned on both the initial principal and the accumulated interest from previous periods. On the other hand, **discounting** is used when determining the present value of future cash flows. It involves calculating how much future money is worth today by applying a discount rate. **Summary:** - **Compounding of cash flows** is used to find **future value**. - **Discounting of cash flows** is used to find **present value**. Therefore, the statement is **True**.

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True! When we refer to compounding of cash flows, we're talking about the process of growing an investment over time by earning returns on both the initial investment and the returns that have been reinvested. This is the essence of future value, making your money work harder for you as it compounds. Discounting of cash flows, on the other hand, deals with determining the present value of future cash flows, essentially reversing the compounding process to evaluate how much those future cash flows are worth today. Each process plays a crucial role in finance, helping investors make informed decisions.

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