You can use the Excel PV function to get the present value of an investment. The function is most fundamental when it comes to calculating the value in today’s dollars of a series of future payments. While working with this function, we assume that future payments are periodic, constant with a constant rate of interest. This article will walk through the PV function.
Figure 1: Getting present value using PV function
General syntax of the formula
=PV (rate, nper, pmt, [fv], [type])
- Rate– is the rate pee period, which is annual
- Nper- total number of payment periods
- Pmt– payment per period
- Fv– cash balance to attain after last payment. It is optional and if omitted, it is assumed to be zero.
- Type– when payments are due. At the end, =0 and 1 at the beginning. Default is 0.
Understanding the Excel PV function
We use the Excel PV function to get the present value of an investment. When the above formula is applied to a set of data, it will return the present value.
The present value is the value in today’s dollars of a series of payments to be made in future. When calculating the present value, three assumptions are made:
- Payments are periodic
- The payments are constant i.e. they do not vary
- The interest rate is also constant
Figure 2: Finding the present value of future payments using PV function
In this example, our interest rate is 10%, monthly payment is $300, and period is 36 months. Note that the interest rate is in terms of years, so we need to divide it by 12 to get it in months.
When we enter the formula
=PV (C2/12, C4, C3) and press enter, we get the present value.
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