Present Value of a Lump Sum Formula

Formula

PV = FV / (1 + i)n
Variables used in the formula
PV = Present Value
FV = Future Value
i = Discount rate
n = Number of periods

Use

The present value of a lump sum formula shows what a cash lump sum received in the future is worth today.

The formula discounts the value of the lump sum received at the end of period n (future value), back to its value at the start of period 1 (present value).

Excel Function

The Excel PV function can be used instead of the present value of a lump sum formula, and has the syntax shown below.

PV(i, n, pmt, FV, type)

*The pmt and type arguments are not used when performing the present value calculation in Excel.

Present Value of a Lump Sum Formula Example

If a lump sum of 25,000 is received at the end of period 10, and the discount rate is 5%, then the value of the lump sum today is given by the present value of a lump sum formula as follows:

PV = FV /(1 + i)n
PV = 25,000 /(1 + 5%)10
PV = 15,347.83

The same answer can be obtained using the Excel PV function as follows:

PV = -PV(i,n,,FV)
PV = -PV(5%,10,,25000)
PV = 15,347.83

The present value of a lump sum formula is one of many used in time value of money calculations, discover another at the link below.

Present Value of a Lump Sum Formula November 6th, 2016Team

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