Discounting versus Capitalizing

In discounting, we project all expected economic income from the subject investment to the respective class or classes of capital over the life of the investment. There is a related process for estimating present value, which we call capitalizing. The essential difference between the discounting method and the capitalizing method is how changes in expected net cash flows over time are reflected in the respective formulas. The capitalization rate, as used in the income approach to valuation or project selection, is derived from the discount rate. The discounting method and the capitalizing method can be combined into a two-stage model or a three-stage model. The Gordon Growth Model is based on expected values so that the growth rate can vary period to period.