Question

Given below are two statements: 
• [Statement (I):] The method which helps to compare the present worth of the future revenue with the present investments is known as compounding. 
• [Statement (II):] 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 most appropriate answer from the options given below. 
 

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

Hint:

Remember the direction of time adjustment:
- Compounding: Moves money forward in time (\(\text{Present} \rightarrow \text{Future}\)). Value grows.
- Discounting: Brings money backward in time (\(\text{Future} \rightarrow \text{Present}\)). Value shrinks.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
Compounding and discounting are mathematical techniques used in finance and agricultural project evaluation to adjust the value of money over time.
These techniques account for the time value of money, which states that a unit of currency today is worth more than the same unit in the future.

Step 2: Detailed Explanation:
Let us analyze both statements:
- Statement (I) is incorrect: The process of converting future values of revenues or costs into their equivalent value today is called discounting.
Discounting calculates the "present worth" of a future sum of money using a discount rate:
\[ \text{Present Value (PV)} = \frac{\text{Future Value (FV)}}{(1 + r)^n} \] Statement (I) describes discounting but labels it as compounding.
- Statement (II) is incorrect: The process of determining the future value of a present sum of money by allowing it to grow over time at a specific interest rate is called compounding:
\[ \text{Future Value (FV)} = \text{Present Value (PV)} \times (1 + r)^n \] Statement (II) describes compounding but labels it as discounting.
Because the definitions of compounding and discounting are reversed in the two statements, both are incorrect.

Step 3: Final Answer:
Both Statement (I) and Statement (II) are incorrect, matching Option (B).