PV Function

In my last article, I had discussed about FV (Future Value) Function, where we used a term PV which signifies Present Value, , also an important Excel inbuilt function for finance guys which we will discuss today in this article.

Let us first understand what is Present Value.

Present Value or PV is the value in the present of a sum of money, in contrast to some future value it will have when it has been invested at compound interest.

How to calculate the present value of an investment ?

What is PV function in Excel ?

PV is the abbreviated form of Present Value, if you need to calculate the Present value on investment periodic deposits or loans etc., you will need to use PV function.

So let’s discuss this function in details.

Description

The Microsoft Excel PV function returns the present value of an investment based on an interest rate and a constant payment schedule.

Syntax

The syntax for the PV function in Microsoft Excel is very simple,

=PV(rate, nper, pmt, [FV], [Type])

Parameters or Arguments

interest_rate

The interest rate for the investment.

number_payments

The number of payments for the annuity.

payment

The amount of the payment made each period.

FV

Optional. It is the future value of the payments. If this parameter is omitted, it assumes FV to be 0.

Type

It is optional. It indicates when the payments are due. If the Type parameter is omitted, it assumes a Type value of 0. Type can be one of the following values:

Value Explanation

0 à Payments are due at the end of the period. (it is default)

1 à Payments are due at the beginning of the period.

Example :

How to use the PV Function in Excel ?

“Suppose you want to invest in a Bank which offers you 8% interest per annum. You plan to invest $300 per month (Present Value : $7200) and you want to run this scheme for 2 years, then obviously, you will be interested to know what will be the present value of your deposits.”

How to use PV Function (Present Value Function)

=PV(C2/C4, (C4*C3), -C5, -C6)

Its very similar to FV function which we had discussed in last article.

Why Present Value or Future Value returns negative value after calculation ?

This is because, if the ‘payment’ argument is for cash going out of business, the payment value will be negative and for cash received, it must be positive.

Note : Make sure use the units of rate and ‘nper’ are consistent. If we make quarterly payments on a 2-year loan at an annual interest of 8%, we need to use ‘8%/4’ for rate and 2*4 for ‘nper’.

If we make quarterly payments on the same loan or investment, then we would use 8%/4 for rate and 4*2 for ‘nper’.

If you still have some questions, feel free to ask in the comment box.

I hope you have enjoyed this small article. Take care…

Thank you for reading….