Discounting to Net Present Value

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#1
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I am embarrassed to ask this but I am confused so here goes. :oops:

Client's divorce settlement calls for him to pay ex $75,000 over the next 4 years for a total of $300,000.

Client is interested in making a lump-sum payment to pay it off and I am trying to figure out what that payment should be assuming an interest rate of 5% 6%.

When I put this in my amortization software using annual compounding I get $259,883. But when I use the net present value formula below, I get $238,095. I would have thought these numbers would come out equal. Why are they different and which is correct?

NPV = Future Value / (1 + Rate)^ Term = 300,000 / (1.06)^4 = 238,095.
Last edited by Tax Me Up on 17-May-2024 12:30pm, edited 1 time in total.
 

#2
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Are you using an interest rate of 5% or 6%?
 

#3
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I meant to say 6%. Math may come out a little different from above but I still have a material difference between NPV formula and T Value amortization software.
 

#4
lckent  
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I think your formula determines the PV of a lump-sum payment of $300k in four years, not $75k a year for four years.
CPA, Retired
 

#5
eze  
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Your a applying the formula wrong.

That formula is for a single payment. You need to calculate for each year and change the N value for each payment.

Also need to consider is the payment beginning, middle, or end of the year?

This is the result using your same formula applied to each payment.
0.06
1/1/2025

12/31/2025 1 70,754.72
12/31/2026 2 66,749.73
12/31/2027 3 62,971.45
12/31/2028 4 59,407.02

259,882.92
 

#6
eze  
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Another thing. Do not you prepay this divorce settlement.

Prepaying is telegraphing to the other spouse that the client is flush with money. This will raise suspicions.

If that doesn't cause a problem, spouse will spend the money on a new boyfriend and drag your client back to court for more money when the money has run out.

Trust me on this....just make the payments on schedule and follow the court order. Don't do anything out of the ordinary.
 

#7
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Thanks for breaking that down and for the advice.
 


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