Example 20 - Present Value Calculation

This example applies to our online demo Time Value of Money Calculator. The C-Value! program for Windows works in a similar way and has a few more features. Note, our online demo TVM calculator is limited to calculations using interest rates between 4.0% and 5.99%

Note:This topic has not been proofed and images need to be added. However, we believe that the steps are complete and accurate.

The present value is the value of a future cash flow as of today.

2. Click the [New] button to clear any previous entries.
4. Set "Rounding" to "Ignore" by either:

• clicking on the "Rounding" button on the toolbar;
• clicking on the {Compute} menu choice and select {Rounding...};

1. The future cash flow may be a single amount or a series of deposits, withdrawals or payments. When calculating the present value, the amount for the first entry is always "Unknown" and the date should be set to the current date. This is true with two exceptions. See Existing Fixed Special Series.
2. The classic PV example assumes some series of income and answers the question "How much should I accept today as a lump sum in lieu of the future income?". Such a question is often asked by an individual that is planning for an imminent retirement where they can take a lump sum amount instead of future pension payments. Attorneys will use this calculation when advising clients on whether to accept a lump sum settlement amount or a series of future payments. Lottery winners will also want to use this calculation when determining if they should accept their winnings in one payment.
3. Let's assume you are the lottery winner.
4. The lottery commission has offered you the choice of receiving $35,045.00 paid monthly for the next twenty years OR a single, lump sum payment of $5,476,123.50. Which option should you select?
5. 1) Open the C-Value! Setup Window. Press either [F6] or select {Settings}{Compute Setup} from the menu.
6. A) For the "Compute Method" select the "Normal" option.
7. B) Set the "Year Length" to 360.
8. C) Click on the [OK] button to close the Window.
9. 2) Set compounding to "Daily".
10. 3) Enter 5.5% for the "Nominal Annual Rate". The is the annual rate of return you are assuming you can earn on any investments you make. This is also known as your "discount rate".
11. 4) Create the first event as a "Withdrawal". We use the withdrawal event here because we are assuming you want to "withdraw" from the lottery proceeds all the future "deposits" that will be made. See event names and creating event names using the events setup dialog window for more details.
12. A) Set the "Date" to October 3, 2004. (10/03/04)
13. B) For the "Amount", type a "U" for "Unknown".
14. C) Enter 1 for the "# Periods".
15. 5) Create the 2nd event. It will be a "Deposit" event. We use the deposit event because we are going to assume that the lottery commission will be making deposits into an account for you. See below note about "Event Names" for more information about this.
16. A) Enter the "Date" as November 1, 2004 for this is the date the first payment would be due from the lottery commission.
17. B) Enter the "Amount" as $35,045.00. This is the periodic winnings.
18. C) Enter 240 for "# Periods"
19. D) Select "Monthly" for "Frequency". Then "End Date" will be October 1, 2024. That is, the last payment from the lottery will be on this date.
20. 6) Click on "Calculate" to solve for the unknown present value. The result is $5,057,830.94. In other words, assuming a future value for 240 monthly deposits of $35,045.00 each the present value is $5,057.830.94. This is less than the lottery is offering ($5,476,123.50) as a single payment amount. Therefore, it would seem reasonable to accept the single payment from the lottery as having a greater value than the future deposits.
21. 7) If you want to see a detailed cash flow schedule showing just what the initial deposit earns in interest, click on the "Amortization" tab above the input area or press [F4].
22. NOTE: This example is NOT considering tax consequences. As we all know, tax implications can be significant. You should seek the guidance of a tax professional if you were making this decision.
23. FURTHER NOTE: This example also does not consider risk. If you accept the single sum settlement option, will you be able to invest the money to equal the future value of the cash flows that the lottery commission is required to pay you? On the other hand, if you accept the series of future payments, what's the risk of the lottery not being able to meet their obligation. Granted, the risk might be slight. But if this example had been illustrating a settlement for a court case and a company had to pay you a future income stream, you have to asses whether or not the company will be able to meet their obligation. In that case, it might be better to take a single lump sum even if it is worth somewhat less than the future cash flow.
24. C-Value! nor any other program, will ever be able to make these decisions for you.

Back to the online Time Value of Money Calculator.