ABSTRACT
Discounting operates in the opposite way. While compounding measures how much presentday investments will be worth in the future, discounting measures how much future benefits are worth today. To figure out this discounted present value, we must first choose a discount rate to transform benefits a year from now into benefits today. If we choose the same discounting rate as the interest rate in the above example of compounding, $106 a year from now would be equal in value to $100 today. Discounting the benefits of a project that generates $200 in twelve years by a discount rate of 6 percent per year would tell us that those benefits are worth $100 today.
