Microsoft Office Tutorials and References
In Depth Information
The PV function
TABLE 16-1 Investment function arguments
Argument
Description
The value of an investment at the end of the term (0 if
omitted).
Future value
Periodic payments ( inflows ) when individual amounts differ.
value1, value2, … value n
Term of investment.
Number of periods
Periodic payments when individual amounts are the same.
Payment
When payment is to be made (0 if omitted); 0 = at end of
period; 1 = at beginning of period.
Type
Number of an individual periodic payment.
Period
Value of investment today.
Present value
Discount rate or interest rate.
Rate
A starting interest rate for iterative calculations (10 percent
if omitted).
Guess
The rate at which you borrow money to purchase an
investment.
Finance rate
The rate at which you reinvest cash received from an
investment.
Reinvestment rate
The PV function
Present value (PV) is one of the most common methods for measuring the attractiveness
of a long-term investment. Present value is the current value of the investment. It’s
determined by discounting the inflows (payments received) from the investment back to the
present time. If the present value of the inflows is greater than the cost of the investment,
the investment is a good one.
The PV function computes the present value of a series of equal periodic payments or of a
lump-sum payment. (A series of equal payments is often called an ordinary annuity .) This
function takes the arguments rate, number of periods, payment, future value, and type ; for
definitions of these arguments, see Table 16-1. To compute the present value of a series
of payments, type a value for the payment argument; to compute the present value of a
lump-sum payment, type a value for the future value argument. For an investment with
both a series of payments and a lump-sum payment, use both arguments.
Here’s a real-world example of how this function works: Suppose you are presented with an
investment opportunity that returns \$1,000 each year over the next five years. To receive
this annuity, you must invest \$4,000. Are you willing to pay \$4,000 today to earn \$5,000
over the next five years? To decide whether this investment is acceptable, you need to
determine the present value of the stream of \$1,000 payments you will receive.
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