If you are considering a settlement offer or if you want to pay off a settlement, you want to find out how much it is worth today. To do this, you need to calculate the present value, because the lump sum of your settlement’s value is going to be worth less in the future than it is today. When you have a claim to see how much money you would accept or pay today, a simple present value calculation is the answer.
Let’s assume you get hurt in an accident and, worst case, you cannot work again. Also let’s assume that you were making $75,000 per year and you could expect to get an average 2% raise per year over the next 20 years. Since we have to discount the future cash flows with a percentage, let’s use 3%.
To figure out the present value of the future cash flows, we will walk you through it using TValue amortization software. TValue makes it simple and can factor in the variables.
First, we will use Monthly compounding as the future cash flows would have been monthly. We could also use Annual if we were going to just use the annual compensation. For the discount rate of 3%, input 3 as the Nominal Annual Rate. Tab to Line 1 for the Loan and use the appropriate Date. For the Amount, type “U” for Unknown. This will be where we determine the present value of the future cash flows.
Proceed to Line 2 and select Payment as the Event. Depending on how detailed you want to be, you can either enter the monthly salary of $6,250 or the annual salary of $75,000 for the Amount. Assuming we are going to do monthly cash flows, we also need to adjust the payroll for annual raises. Select Special Series and then select Percent Step. For the Percent Step Series, enter 2 for the Percent change per level, and 12 (monthly) as the Number made before change. Finish the cash flow information by entering 240 as the total Number of payments on Line 2.
Note: there are many variables that are not time sensitive that may go into the settlement calculation, but we are showing you a simple example of how to do a calculation based on the future cash flows part of the equation.
Now that you have your information entered, click the Calculate button and the calculated settlement value of the $75,000 with a 2% increase over 20 years discounted at 3% is $1,342,413.14. This is based on future cash flows of over $1.8 million. Time value of money is an important valuation technique.