The full guide
Present value of a payment stream — what a pension, lease, or structured payout is really worth today
Reviewed and updated July 16, 2026 · Written for Sri Lankan investors and borrowers
Which is worth more: Rs. 10 million in hand today, or Rs. 100,000 a month for the next 20 years? The instalments total Rs. 24 million — but they arrive slowly, and money received later is worth less than money received now, because today’s rupees can be invested to grow. Present value (PV) is the tool that makes such comparisons honest, and it sits underneath every pension valuation, lease negotiation, and settlement decision.
This guide builds the intuition, works a full LKR example, and shows why the discount rate you choose is the whole argument.
The core idea: discounting
If you can earn an assumed 10% a year, then Rs. 110 arriving next year is worth Rs. 100 today — you would be indifferent between them. Discounting runs compounding in reverse: each future payment is shrunk by the return you could have earned while waiting for it. Payments arriving in 20 years get shrunk twenty times over, which is why distant money contributes surprisingly little to present value.
For a level stream of payments (an ordinary annuity), the shortcut formula is: PV equals PMT multiplied by (1 minus (1 plus r) to the power of minus n), divided by r — where PMT is the payment per period, r the discount rate per period, and n the number of periods.
Worked example: a 20-year payment stream
Take Rs. 1.2 million a year (Rs. 100,000 a month) for 20 years, discounted at an assumed 10% annual rate. The annuity factor is (1 minus 1.10 to the power of minus 20) divided by 0.10, which is about 8.51. Multiplying by Rs. 1.2 million gives a present value of roughly Rs. 10.2 million — far below the Rs. 24 million sticker total.
So if someone offered you Rs. 12 million today instead of that stream, and you genuinely believe you can earn 10% on invested money, the lump sum is the better deal. At a 6% discount rate the annuity factor rises to about 11.47 and the stream is worth roughly Rs. 13.8 million — now the stream beats the Rs. 12 million offer. Same payments, opposite conclusion.
Choosing the discount rate — where all the judgment lives
The discount rate should reflect what you could realistically earn, after tax, on money of similar risk over the same horizon. For a near-certain stream (a government pension), a rate near long-term government securities yields is defensible; for an uncertain stream (rent from a tenant who might leave), a higher rate compensates for the risk. Two honest rules: never discount a risky stream at a safe rate, and always test a range of rates rather than betting the decision on one number.
Where Sri Lankan readers meet this math
Present value shows up more often than people expect.
- Pension versus lump sum: compare a monthly pension’s PV against an EPF-style lump sum on equal terms.
- Leases and rent-to-own deals: total instalments always look worse than they are; PV reveals the true cost.
- Insurance and settlement payouts: a structured payout’s PV is the number to compare against a lump-sum offer.
- Loans in reverse: your loan’s principal is the present value of your future instalments — same formula, lender’s side.
Ordinary annuity versus annuity due, and using the calculator
One technicality: the formula above assumes payments arrive at the end of each period (an ordinary annuity). If payments arrive at the start of each period (an annuity due, like most rents), each payment is discounted one period less, so the PV is higher by a factor of (1 plus r). The calculator handles both — enter the payment, frequency, term, and a discount rate, then test optimistic and pessimistic rates before making any real decision.
Present value is only the numerical screen. Before accepting a payment stream, check who guarantees it, whether payments rise with inflation, what happens on the payer’s default, and whether a spouse or estate receives anything after your death. A fixed Rs. 100,000 payment may have an attractive PV but steadily lose purchasing power; an inflation-linked amount can be worth more even if its first cheque is smaller. Also confirm whether the stream may be assigned, borrowed against, or commuted later, because an illiquid promise cannot pay a sudden hospital bill. Put every offer on the same valuation date, use after-tax cash amounts, and run at least three discount rates. When two choices are close, liquidity and counterparty strength deserve more weight than a tiny modelled advantage.
Sources & further reading
This guide is educational and reflects publicly available rules and market conventions at the review date. Tax rates, bank rates, and regulations change — verify current figures with the institution or the Inland Revenue Department before making a financial decision. Nothing here is financial, tax, or investment advice.