A lump sum formula can be used to compare lump sum cash flows which are received or paid at different times and reflect the time value of money. There are lump sum formulas for calculating present value (PV), future value (FV), discount rate (i) and number of periods (n).
From Present Value to Future Value of a Lump Sum
A lump sum received now and deposited at a compounding interest rate for a number of periods will have a future value.
To illustrate, suppose you have 100 and deposit it at 5%. After 1 year you would have 100 + 100 x 5% = 105. Likewise after 2 years you would have 105 + 105 x 5% = 110.25, and so on.
In this example, the 100 is the lump sum received now referred to as the present value, and the 110.25 is the value in 2 years time at an interest rate of 5% and is called the future value.
From Future Value to Present Value of a Lump Sum
A lump sum received in the future and discounted back at a compounding interest rate (the money you would lose by not being able to invest it now) will have a present value.
To illustrate, suppose you receive 110.25 in 2 years time, and could have earned 5%. Consequently in 1 years time the value of the lump sum would be 110.25 / 105% = 105. Likewise after 2 years the value of the lump sum would be 105 / 105% = 100.
In this example, the 110.25 is the future value of the lump sum, and the 100 is the present value of the lump sum at 5% for 2 years.
Lump Sum Formulas
The following summarizes for easy reference the formulas for calculating present value of future payments, future value of lump sum, the compounding interest rate, and the number of periods of compounding. An example of using the lump sum formulas is given, together with the corresponding Excel formulas.
Accordingly, the formula to use will depend on which three of the four variables are already known.
In all present value and future value lump sum formulas the following symbols are used.
- FV means future value
- PV means present value
- i is the period discount rate
- n is the number of periods
- LN is a natural logarithm
- * means multiply, and ^ means to the power of
The example used below for each of the annuity formulas is based on the following information.
- Future value = FV = 7,335.93
- Present value = PV = 4,622.88
- Period discount rate = i = 8%
- Number of periods = n = 6
Future Value of a Lump Sum Formula
| Formula | FV = PV x (1 + i)^n |
| Example | FV = 4622.88 x (1 + 8%)^6 = 7,335.93 |
| Excel Future Value Formula | FV = – FV(i,n,,PV) |
Present Value of a Lump Sum Formula
| Formula | PV = FV / (1 + i)^n |
| Example | PV = 7,335.93 / (1 + 8%)^6 = 4,622.88 |
| Excel Present Value Formula | PV = – PV(i,n,,FV) |
The Find the Compounding Discount Rate
| Formula | i = n√(FV / PV) – 1 |
| Example | i = (7335.93 / 4622.88)^(1 / 6)-1 = 8% |
| Excel Interest Rate Formula | i = RATE(n,,PV,- FV) |
To find the Number of Periods
| Formula | N = LN(FV / PV) / LN(1 + i) |
| Example | N = LN(7,335.93/4,622.88)/LN(1+8%) = 6 |
| Excel Periods Formula | N = NPER(i,,PV,- FV) |
Additionally the lump sum time value of money formulas are summarized 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 and has built financial models for 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 degree from Loughborough University.