Calculating the Present Value of a Future Lump Sum

The basic steps in calculating the present value of a future lump sum are as follows:

  1. Enter the Payments/Year
  2. Enter the rest of the information you know
  3. Solve for the unknown.

Let's try it with a problem
Consider that you buy a $1000 US Savings Bond that will mature in five years and paid 8% interest per year. How much should you pay today for the bond?

First, let's see what we know

  • We know that the bond will be worth $1000 in five years. That indicates that the future value (FV) of that bond is $1000.
  • We know that the number of years (xP/YR) is 5.
  • We know that the annual interest rate is 8% (8 is the I/YR).
  • Finally, we may assume that the periods per year is one since we are not told it is monthly, quarterly, etc. (If the payments per year would have been, for example, monthly, the problem would have read, ". . . paid 8% per year, compounded monthly.")

Now let's compute the problem

  1. Enter the Payments/Year.
    You first must type in the appropriate number (eg. monthly would be 12, quarterly would be 4, etc.), then push the orange SHIFT key , then the P/YR key.

    In our problem, first we must enter the appropriate payments per year by pushing 1, then push the orange SHIFT key , then the P/YR key .

  3. Enter the rest of the information you know.
    The order of the next three steps is not important, but I recommend that you follow across the financial tour of your calculator from left to right.
    • If you do, then the next step would be to enter in the proper number of years. You first type the appropriate number, then push the orange SHIFT key , then the xP/YR key.

      In our problem, next we will enter the number of years by pushing 5, then
      the orange SHIFT key , then the xP/YR key.

    • Now, enter the appropriate interest rate per year. This is done by entering the appropriate annual interest rate as a whole number, not as a decimal (the calculator will convert it to decimal automatically), then pressing the I/YR key.

      In our problem, now we will enter the interest rate per year by pushing 8 and then pressing the I/YR key.

    • Next, enter the lump sum amount to be received in the future, then press the FV key.

      In our problem, next we enter the Future Value by pressing 1000 and then the FV key.

  5. Solve for the unknown.
    Finally, all that is necessary is push the PV key to compute the answer.
  6. Correct Answer
    The display then shows -680.58 if the display was set to show two decimal places. Note that the answer is negative. This indicates that the direction of the cash flow is out. (This is logical if we will be getting $1000 in the future, we must pay $680.58 now.)

Would you like to review the mathematics of this calculation?

return to the top

return to main page

Send mail to Dr. Jerry Belloit with questions or comments about this web site.
Copyright 2005  Dr. Jerry D. Belloit