PRESENT VALUE OF LUMP SUM CALCULATOR (COMPOUND INTEREST)

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Frequently Asked Questions (FAQ) About Lump Sum

What is a lump sum?

A lump sum payment is merely one large payment rather than several smaller ones.

It refers to an amount paid at a single time.

What is the present value of a lump sum?

The present value of a lump sum is the worth of a lump sum right now.

The present value, sometimes known as the principal, is the current value of money. 

In other words, It is the present worth of a future sum of money

How do you calculate the present value of a lump sum

The present value of a lump sum can be calculated using the following formula:

$$PV=\frac{FV}{\left(1+\frac{r}{m}\right)^{n \times m}}$$

What is FV?

FV stands for Future Value. The future value of a lump sum refers to how much it will be worth in the future if it is compounded at a certain interest rate.

That is, the future value tells you how much a given sum of money will be worth at some point in the future if it is compounded at a given interest rate.

You can calculate the future value using this calculator.

What is r?

In the formula above, r signifies the annual discount rate/interest rate. The annual discount rate refers to the rate of return that is used to calculate the present value of a future sum of money.

To make the explanation simple, some authors usually refer to r as the interest rate instead of the discount rate. 

As you shall see later in this post, they both serve the same purpose. 

What is n?

n is the number of years it takes to discount a future sum of money to a specific present value.

What is discounting?

In Lump sum, discounting can be defined as the process of determining the present value of a sum of money that will be received at some point in the future

To put it another way, discounting is the process of calculating the present value of a sum of money that will be received in the future.

What is the difference between discounting and compounding?

Discounting and compounding mean the same thing used in different ways.

The main difference is that when we want to know the future value of a lump sum, we use compounding, and when we want to know the present value of a lump sum, we use discounting.

In other words, we used compounding to get future value from the present value of a lump sum, but we used discounting to get the present value from the future value of a lump sum.

What is the difference between the discount rate and the interest rate?

The major difference between the discount rate and interest rate the discount rate is that the discount rate is used to calculate the present value of a lump sum, whereas the interest rate is used to calculate the future value of a lump sum.

In other words, the Interest rate is the rate used to convert present values into future values while the discount rate is the rate used to convert future values into present values.

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