Present Value of Funds...?

[kellywy]

Okay - let me try this again. (since I think my previous post was a bit too convoluted - even for me!)

I need to figure out the Present Value of a monthly payment of $124.00, 36 months from now, at a 10% discount rate.

Or - perhaps looking at it this way: At which month (during the 36-month period) does the $124 payment go below $111.60 in value? ($111.60 = $124*90%)

Can anyone help me with this one?

 

[stnkynts]

At what rate is the value of that initial monthly payment dropping? Is it 10% per month? per year? or are you trying to adjust for inflation values?

 

[kellywy]

It's at 10% per month.

Short story: Trying to decide whether to accept/renegotiate:
(1) a settlement of payments made at $124 x -10% per month over 36 months.....($4,017.60);
(2) or to accept $4,464 now ($124 x 36 months) - upon which interest can be earned at 7% over those 36 months.

Somewhere along that 36-month timeline, it would seem that the 10% discount would be surpasssed by the 7% earnings.......right?

I hope this makes sense!

 

[kellywy]

Sorry - this really confuses even me this time!

The 10% discount is a savings on a monthly expense - and is fixed. So instead of my having to pay $124/month for 36 months out of my pocket -- it would be paid FOR me at the 10% discount of $111.60/month for 36 months.

So I'm trying to figure out what that value is to me NOW. ?

 

[stnkynts]

I am extremely confused on the situation. Are you recieving a settlement or paying a settlement. If you are recieving you want to take the lump sum (if you are not going to be taxed on it). If you have an option of payment on a settlement as a Lump sum I don't understand how you can calculate interest to be earned at a rate of 7% on money you paid out. Is this by chance a repayment to a 401K?

Either way based on the data you provided, which btw has probably been brought to the completely wrong forum, if you have to repay another party a sum of money and you do not have to pay interest then you would always want to pay monthly. That way you could earn the interest for yourself.

If you are paying yourself back I would just pay a lump sum and be done with it. A good nights sleep has a value all by itself.

 

[kellywy]

Thanks for the info -- and obviously, I am more confused in trying to just explain this than in trying to find the answer. I appreciate your comments, as it clarifies that I'm explaining this all wrong. If it helps any -- I'm trying to calculate between:

(a) Receiving a settlement in the amount of $4,017.60 (in the manner of 'credit' given monthly towards Club Dues for 36 months) -- which represents a 10% discount on what would normally be dues of $124/month; or

(b) Receiving a cash settlement now of $4,017.60 - and assuming I can make an annual return of 7% on that figure.

I.e.: (1) Am I better off with the $4,017.60 credit on my dues for 36 months;
(2) Or taking the $4,017.60 cash NOW, earning 7% annually on that figure; and paying the full $124/month for 36 months ($4,464).


(BTW -- What other forum should I try to post this on, by the way? I'm trying not to be dense....I just don't know!)

Appreciate your patience........

Kelly

 

[Xx7]

The present value of the 36 payments is $4,015.92 vs. the amount that you would receive now of $4,017.60. Pretty much no difference. (i'm assuming a discount rate of 7% in the PV calculation.

You should consider other factors though. Such as what is the likelyhood of receiving a 7% rate of return? This seems pretty high based on the economy. Are there any investment management fees that will eat away at this amount? 3 years of fees could be significant.

If you take a credit on your dues, then aren't you obligated to stay with them for 36 months? whereas if you got the cash you would have free reign to do whatever you want with it. What are the club dues at other places? You should investigate this.


Excel formula:

=PV(0.07/12,3*12,124,,0)

Here's the hand written formula: $124 [(1-(1+.07/12)^-36)/(.07/12)] = $4,015.92

 

[kellywy]

Thank you SOOO much! I think that answers my question.

And I understand your comments about the variables. Definitely things to be taken into consideration. (As for the dues part - they go along with properties owned.....and the likelihood of selling them anytime soon and escaping this monthly expense is slim at this point.....hence the question about the best way to go with this.)

I reeeeally appreciate your help!!

--Kelly

 

[Xx7]

No problem. Glad I could help!!