Compounding is to multiplication as discounting is to division.
It’s just going one way or the other.
Compounding is going from value of money today (present value) to value of money some years from now (future value).
Discounting is going from value of money today (present value) to value of money some years from now (future value).
Take the following series: 2, 4, 8, 16, 32, etc.
8 x 2 = 16
Let’s call that compounding.
16 / 2 = 8
Let’s call that discounting.
We are simply moving in different directions.
Why is this relevant? Because we receive money at different periods of time.
So we need to get everything in terms of a specific point in time (usually the time of doing the valuation, say t=0).
We do this by discounting the value of future cash to the value today.
Bottom-line? Compounding and discounting are opposite operators. But, the returns and/or percent changes are not affected. It’s only the direction we are moving in.
