All time value of money problems involve two fundamental techniques: compounding and discounting. Compounding and discounting is a process used to compare dollars in our pocket today versus dollars we have to wait to receive at some time in the future. Before we dive into specific time value of money examples, let’s first review these basic building blocks.
Compounding is about moving money forwards in time. It’s the process of determining the future value of an investment made today and/or the future value of a series of equal payments made over time (periodic payments).
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