When comparing compounding and discounting, which of the following statements is true?

The assertion that compounding increases while discounting decreases is particularly insightful in understanding the relationship between these two financial concepts. Compounding refers to the process of earning interest on both the initial principal and the accumulated interest from previous periods. This results in an exponential growth of the investment over time, illustrating how compounding magnifies the value of the investment as time progresses.

On the other hand, discounting is the inverse process, where future cash flows are reduced to reflect their present value. This is necessary because a dollar today is worth more than a dollar in the future due to factors like inflation and opportunity cost. As time extends into the future, the value of those future cash flows decreases when discounted back to the present.

The interplay between these two processes is crucial in financial assessments, as they both serve analytical purposes in valuing investments and taking time value of money into account. Thus, the statement accurately captures the contrasting effects of compounding and discounting on financial calculations. Understanding this dynamic is essential for making informed investment decisions and understanding potential returns over time.

While the other options might touch on relevant aspects of compounding and discounting, they do not encapsulate the intrinsic relationship and effects on value over time as well as this statement does.