GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Principle of compound
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Principle of discounting
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Both (a) and (b)
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None of the above
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Detailed explanation-1: -Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.
Detailed explanation-2: -PV is the Present Value or Principal. This is the new unknown variable. If this is in fact the amount at the start of the financial transaction, it is also called the principal. Or it can simply be the amount at some earlier point in time than when the future value is known.
Detailed explanation-3: -Discounting can be regarded as the reverse of addition of interest. Taking a discount rate r of 0.1 (10%), expenditure or cost of $100 in one year’s time has a present value of 100/(1 + 0.1) = $90.9.