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How to Calculate Present ValueTutorial 20

Present value is a critical financial concept.

Investors calculate the present value (PV) of the remaining scheduled payments when purchasing a mortgage or loan. To settle disputes, attorneys make present value calculations when determining the value of an anticipated future cash flow. wikinvest defines present value as "...today's value of a set of cash flows that will occur in the future. It is calculated by dividing future cash flows by an appropriate discount rate." The Ultimate Financial Calculator is designed to calculate present value under any scenario, for any cash flow.

This example applies to our online Ultimate Financial Calculator. The C-Value! program for Windows works in a similar way and has a few more features including the ability to save your work.

All users should work through the first tutorial to understand basic concepts about the calculator.

For this tutorial, let's assume you are a lottery winner. 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?

To calculate the present value, follow these steps:

1. Set "Schedule Type" to "Savings"
• Or click the [Clear] button to clear any previous entries.
• The top two rows of the grid will not be empty
• Delete the 2nd row by selecting it and clicking on the [Delete] button
2. Set "Rounding" to "Open balance — no adjustment" by clicking on {Settings} {Rounding Options}
3. In the header section, make the following settings:
1. For "Calculate Method" select "Normal"
2. Set "Initial Compounding" to "Exact/Simple"
3. Enter 5.5 for the "Initial Interest Rate"
• This is the annual rate of return you assume you can earn your investments
• It is also known as your "discount rate"
1. In row one of the cash flow input area, create a "Withdrawal" series
1. Set the "Date" to "October 3, 2016"
2. Set the "Amount" to "Unknown"
3. Set the "# Periods" to 1
• Note: Since the number of periods is 1, you will not be able to set a frequency. If a frequency is set, it will be cleared when you leave the row
1. Create the anticipated series of lottery payments in the second row
1. Select "Deposit"
2. Enter the "Date" as "November 1, 2016"
• Expected date the first payment is due from the lottery commission)
3. Enter the "Amount" as \$35,045.00 (periodic winnings)
4. Enter 240 for "# Periods"
5. Select "Monthly" for "Frequency". The calculated "End Date" will be October 1, 2036. (The last payment date.)
1. Click the [Calculate] button
• The result is "\$5,063,030.40"