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.