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Qn 1.1What is the relationship between discounting and compounding?

Discounting also referred to present value is a methodology used to determine the present

value by using the discount rate and future sum offered. Compounding is the opposite of

discounting as it determines the future value using present value and the discount rate

offered.

Qn 1.2.

Bank C which compounds daily. As per the compound interest, the more the amount is

compounded we receive that much amount of interest on the amount. Therefore, as it compounds

daily, the principal amount increases daily yielding higher interest returns.

Qn 2.

Solution:

Option 1

Option 2

Option 3

Cash inflow

1,200

11,000

26,650

Year

0

12

25

PVIF

1

PVIF @ 12 % for 12 years

0.2567

PVIF @ 12 % for 25 years

Present value of o...