What is another term for calculating present value?

Calculating present value involves determining how much a future sum of money is worth today. This process is known as discounting because it applies a discount rate to future cash flows to account for the time value of money. Essentially, discounting reflects the idea that a specific amount of money today can be worth more than the same amount in the future due to its potential earning capacity.

When you calculate the present value, you are reducing the future value back to its current worth by using a predetermined interest or discount rate. This process emphasizes that money available now can earn interest, and thus, investments or financial savings grow over time. Hence, by discounting future cash flows, one can make more informed financial decisions regarding investments, loans, and other fiscal matters.

The other terms mentioned—future value, averaging, and compounding—are related concepts in finance but serve different functions. Future value is the value of an investment at a specified date in the future, requiring a different calculation than present value. Averaging pertains to calculating an average, which does not relate to time value. Compounding refers to the process of accumulating interest on an investment over time, which contrasts with the concept of discounting.