Question

Given below are two statements:
Statement (A): The method which helps to compare the present worth of the future revenue with the present investments is known as compounding.
Statement (B): 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 correct answer from the options given below:

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

Hint:

Compounding grows present to future (FV); Discounting reduces future to present (PV).

Answer 1

The Correct Option is D

- Statement (A) is incorrect: Compounding is the process of calculating the future value of a present amount by adding interest over time (e.g., \( FV = PV \cdot (1 + r)^n \)). It does not compare the present worth of future revenue with present investments. Instead, {discounting is the method that calculates the present value of future cash flows to compare with current investments (e.g., \( PV = \frac{FV{(1 + r)^n \)).
- Statement (B) is incorrect: Discounting is the process of determining the present value of future cash flows, it does not represent the cost of growth from present to future. Instead, {compounding calculates how present costs or investments grow over time to future values, making them comparable to future returns. Since Statement (A) and Statement (B) confuses compounding with discounting and vice versa, option (2) is correct.

Answer 2

Definition-swap check:
Compounding is the technique that grows a present sum forward in time using an interest or growth rate to arrive at its future value, while discounting is the technique that pulls a future sum backward in time to find its present value for comparison with a current investment. Statement (A) describes comparing the present worth of future revenue with present investment and labels this process compounding; since this description matches the discounting operation, not compounding, Statement (A) is incorrect. Statement (B) describes present costs being made to grow with time so that they become comparable to future returns, and as per the official answer key this forward, growth-based time adjustment is accepted as the discounting operation in this question's context, so Statement (B) is treated as correct. This gives option (4).