In this post we are going to look at Present Value and how to use the PV function in Excel.
Present Value is what money in the future is worth now. To get the PV of future money, we would work backwards on the Future value calculation. This is called discounting and you would discount all future cash flows back to the present point in time.
Like the future value calculations in Excel, when you are calculating present value to need to ensure that all the time periods are consistent. This means that you will need to divide the annual interest rate by the number of compounding periods in the year.
Present Value Function Syntax:
The syntax for present value in excel is
=PV(rate, nperiods, pmt,[fv],[type])
Rate is the Period interest rate
Nperiods is the number of compounding periods
PMT is optional and if PMT is omitted, you must include the FV argument. PMT is the actual payment made each period including capital and interest,
FV is in square brackets indicating this value is optional. It refers to the Future value you wish to discount back to. For example you know you need $30,000 for your child’s college in 8 years time. The $30K is the Future Value
Type, also in square brackets indicating this value is optional. 0 or omitted means that payments will be calculated at the end of the period, 1 means that payments are due at the beginning of the period
Let’s now go over to excel in the video below and look at a present value calculation with a simple example:
Present value is one of many Financial functions available in Excel. Financial Functions make complex calculations easy and quick to complete in an Excel Spreadsheet. The Present value calculation also works the same in Google Sheets as do many of the other Financial Functions.
If you want to learn more about Financial Functions in Excel, check out my course – Financial Functions in Excel