Main Menu Name: Discount
Calculates the value today of a given amount of money to be received at some point of time in the future. The calculation is based on a specific rate of interest that will apply throughout the stated period of time.
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Many individuals want to meet specific monetary goals at particular points in time. For example, you may want to save $100,000 in 10 years to send your two children to school. You want to know how much you have to set aside today.
Likewise, the present value of a future lump sum is a way to decide how much should (or would) be paid today for an asset that will be received in the future. For instance, a person may estimate that he or she will receive a $200,000 lump-sum distribution from a retirement plan in 20 years. While this may sound like a lot of money, the fact that it will not be received for another twenty years makes it worth much less today.
How much less is it worth today? That depends a lot on the "discount rate," the interest rate assumed throughout the twenty-year period.
The higher the discount rate, the lower the present value of a given future amount. Put another way, you would have to invest less today to reach a specific future objective if interest rates were high rather than low throughout the period of time.
Many individuals try to achieve specific financial goals at particular points in the future. For example, a father may want to save $100,000 in 10 years to pay for his children's education expenses. He wants to know how much he needs to set aside today to meet this goal. This calculation determines the present value of the future lump sum needed to meet this goal.
This calculation is also useful for determining how much should be paid today for an asset that will be received in the future. For example, a person estimates that he will receive a $200,000 lump sum distribution from a retirement plan in 20 years. Since the distribution will not be received for twenty years, its value is worth much less today. The actual value depends greatly on the interest rate assumed in that 20-year period. If interest rates were high during the 20-year period, less money would have to be invested today to meet the specified future goal.
- Expected Future Lump Sum: Enter the amount of the lump sum that should be saved by a specific time in the future.
- Projected Interest Rate: Enter the interest rate assumed for the specified number of time periods. Interest is compounded each period.
- Number of Time Periods: Enter the number of periods until the lump sum is received. For example, if you are analyzing monthly compounding, enter the number of months until the lump sum is received. It's important to remember to enter an interest rate appropriate to your assumed time period.
The program shows the current value of a specified lump sum that will be received some time in the future. The lump sum is the amount specified at the Expected Future Lump Sum entry field. The calculation assumes that the specified rate of interest remains the same throughout the specified period.