Use
The lump sum discount rate formula is used to work out the discount rate (i), needed to compound a lump sum from from its present value (PV), to a future value (FV) in a number of periods (n).
Formula
i = (FV / PV)(1 / n) - 1
PV = Present Value
FV = Future Value
i = Discount rate
n = Number of periods
Our lump sum discount rate calculator is available to help when using the above formula.
Excel Function
The Excel RATE function can be used instead of the lump sum discount rate formula, and has the syntax shown below.
RATE(n, pmt, PV, FV, type, guess)
*The pmt, type, and guess arguments are not used when calculating the discount rate for a lump sum.
Lump Sum Discount Rate Formula Example
If a lump sum of 1,500 is received at the start of period 1, then the discount rate needed to compound this to 5,000 after 10 periods is given by the lump sum discount rate formula as follows:
i = (FV / PV)(1 / n) - 1 i = (5,000 / 1,500)(1 / 10) - 1 i = 0.1279 or 12.79%
The same answer can be obtained using the discount rate formula in Excel as follows:
i = RATE(n,,PV,-FV) i = RATE(10,,1500,-5000) i = 12.79%
*don’t forget the minus sign on FV
The lump sum discount rate formula is one of many used in time value of money calculations, discover another at the links below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.