How is Net Present Value Calculated?

1.

We calculate the annual future cash flows from the start date to the end date of the income resource or goal. If an item has an annual adjustment factor applied, such as Inflation, then we inflate the amount entered for the item each year by the annual adjustment factor from the current date forward.

The default Inflation rate is currently 2.5%; however, you can enter your own rate on the Economic Assumptions page for a plan.

NOTE: The start and end dates that the Household Balance Sheet uses to determine the period for the future cash flows depends on the type of resource or goal and the date information entered for the item in the plan. There are other factors that may impact the start or end date, such as the retirement date or life expectancy of the household. All of these factors are outlined later in this document for each income and goal type.

 2.

We calculate the present value of each year’s future cash flows.

NOTE: The discount rate(s) used to determine the present value of the future cash flows depends on the type of resource or goal and the information entered for the item in the plan. The different discount rates that the Household Balance Sheet uses are explained further in this document in the Economic Assumptions section.

3.

We sum up the annual present value cash flows to determine the total present value for the item.

4.

If an item’s cash flows are considered pre-tax dollars, like a retirement savings plan, we will calculate the total present value of the deferred income taxes on those cash flows and deduct that amount from the total present value to get the NPV of the item.

Deferred income taxes are calculated using the Effective Tax Rate for Household entered for the plan on the Plan Information screen.