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Time Value of Money in Structured Settlement Factoring Transactions



Settlement Quotes has received several inquiries for an explanation on why there is such a large difference between the present value and future value of a cash flow. We will use as an example the highly publicized Ciemielewski case to show our readers how the time value of money effects the lump sum payment an annuitant receives when factoring a structured settlement.

Mr. Ciemielewski was receiving two lump sum payments in 2019 and 2024. Settlement Quotes offered this individual $32,000, which is an 8.5% discount rate. To make this equation easier for our readers, we will say that Mr. Ciemielewski was only receiving one payment of $100,000 in 2024. The $100,000 figure would be the future value of the cash flow, while the $32,000 figure would be the present value of the cash flow.

Here are the formulas for Present Value and Future Value of a lump sum:

  • PV= Present Value
  • FV= Future Value
  • i= rate at which the amount will be compounded each period or discount rate
  • n= is the number of periods

Present Value Formula

 

Future Value Formula

Why can you only offer $32,000 for the $100,000 payment?

Because of the time value of money. Is $100,000 today the same as it will be in 2024? Actually, it is not. $100,000 can do far greater things now, than it will be able to do in 2024. This is the reason we can only offer $32,000 for the future payment of $100,000.

Lets take a look at what Mr. Ciemielewski can do with the $32,000 for the next 16 years.

This illustration shows how the time value of money effects the present value from the future value. If Mr. Ciemielewski saves the entire $32,000 at a decent interest rate, he can result in the same amount of money he would have previously received if he did not factor the payment.

Now lets compare our $32,000 offer to Sececaone's $10,000 offer.

This illustration shows how miserable Senecaone's offer to Mr. Ciemielewski really was. After 16 years at a 7% interest rate, he would not accumulate enough money to match our initial offer of $32,000.

We will continue with more examples and tools at a later date to help our readers better understand how the structured settlement factoring industry works. If you have any questions please comment and let us know.

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