Using the Present Value Function (2)

You use the PV function to calculate present value. The syntax is

PV(rate, nper, pmt, [fv, type])

The first three arguments are required:

• rate is the interest rate per period.

• nper is the number of periods.

• pmt is the payment per period.

The other two arguments are optional:

• fv is the future value, the balance at the end of the term, which is 0 in almost all situations. If omitted, the function assumes 0.

• type is 1 if the payments are made at the start of each period, 0 or omitted if payments are made at the end of each period.

To try out the PV function, start with a blank worksheet and follow these steps:

1. Enter the labels Rate of return, Monthly payment, Number of months, and Present value in cells B2 through B5, in order.
2. Format cell C2 as percentage with two decimal places.
3. Format cells C3 and C5 as currency with two decimal places.
4. Enter the following formula in cell C5: =PV(C2/12,C4,C3).

As before, the monthly payment is entered as a negative value.

The worksheet shown in Figure 3.5 shows an example of evaluating the present value of $200 per month over 12 months assuming a 4% return. Returning to the example presented earlier, where you are offered this $200 per month or a lump sum of $2,300, you can see that the present value of these payments, assuming a 4% return, is $2,348.80. This tells you that the monthly payments are a better deal than the lump sum. If the interest rate were higher, you would see that the PV increases. Of course, if you need the money right away, that is another matter!

Taken From : Manage Your Money and Investments with Microsoft Excel

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