PV is also known as the present value and this function is used to calculate the current present value for any investment done and this present value is dependent on the rate of the investment and the number of periods for the payment with the future value as an input, this function is available in the financial category of the formulas tab in excel.
PV Function in Excel
PV Function in Excel (or Present Value) is a financial function, which calculates the PV Function of a future sum of money or fixed cashflows at a constant rate of interest. PV in excel is based on the concept of the time value of moneyConcept Of The Time Value Of MoneyThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment.read more. For example, receiving Rs. 5,000 now is worth more than Rs. 5,000 earned next year because the money received now could be invested to get an additional return till next year. PV in excel function is commonly used to compare investment alternatives, as in stock valuation, bond pricingBond PricingThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity (YTM) refers to the rate of interest used to discount future cash flows.read more, financial modeling, insurance, banking, and pension plans, etc.
For an investment to be made today, investors calculate the PV in excel of expected cash flows to decide upon the investment. Suppose you have an amount of Rs. 10,00,000 today to invest, and you have two alternate plans, which is expected to give you
- 30,000 monthly for the next 5 years (which is Rs. 18,00,000 in total).
- 25,000 quarterly for the next 20 years (which is Rs. 25,00,000 in total)
Both of the investment plans seem to be giving a good profit. Rs. 25,00,000 (case 2) is more than Rs. 18,00,000 (case 1), and both of them are more than the current investment of Rs. 10,00,000. However, not in terms of time. In this, you would like to know the present value of these regular cashflows to decide upon if this investment is worth making and to compare it between the two investment alternatives. By the end of this article, you will realize that plan 1 is much better than plan 2.
PV in Excel Formula
In Excel, there is a built-in function to calculate PV in Excel. The PV excel formula is given as:
The arguments in the PV excel formula are as follows:
| rate* | The rate of interest or return per period. Also termed as discount rate |
| nper* | The number of periods for the lifetime of the annuity or investment. |
| pmt | The payment is made per period. It includes both principle amount and interest. |
| fv | It specifies the future value of the annuity at the end of nper payments. (default value: 0) |
| type | Optional. Value: 0 or 1. It defines whether the payment is made at the start or the end of the period. 0: the payment is made at the end of the period; 1: the payment is made at the start of the period. (default value : 0 denoting payments made at the end of the period). |
If pmt is omitted, the fv argument should be provided.
PV in Excel – Assumptions
There are two assumptions of PV in Excel function:
- Constant and Periodic payment
- Constant rate of interest or return
A series of cash flows that include a similar amount of cash flow (outflow or inflow) each period is called an annuity. For example, a car loan is an annuity. When each period’s interest rate is the same, an annuity can be valued using the PV function in excel. In the case of annuity functions, a general convention of cash flow is followed- cash outflows are represented as negative, and cash inflows are expressed as positive. So, the pmt is negative if it is an outflow.
You can use PV formula excel with i) periodic and constant payments and ii) future value. If you opt for a car loan, you are supposed to pay a fixed amount of money periodically, say Rs. 20,000 monthly for two years. In this case, you use the pmt option as Rs. 20,000 to calculate the present value. You can also use the PV function in excel with a fixed future value. Suppose you plan to attain a sum of Rs. 5,00,000 after 5 years for your child’s education, you can calculate PV formula in excel using the fv option.
How to Use the PV Function in Excel?
Let understand the working of PV Function in excel with a few PV in excel function examples.
PV in Excel Function Example #1
With an interest rate of 7% per annum, payment of Rs. 5,00,000 is made on a yearly basis for five years.
The present value of an annuity can be calculated using the PV function in Excel as PV(7%, 5, -500000), as shown in the example below.
The present value in the above case is Rs. 20,50,099.
It may be noted that in this case, the interest rate is the interest rate per period, which is different from the interest rate per annum used commonly.
PV in Excel Function Example #2
Suppose you make quarterly payments of Rs 1,25,000 per period for five years, having an interest rate per annum of 7%. The interest rate per period will be counted as 7%*4/12 quarterly.
The PV Function Excel will be given as (rate=7%*4/12, nper=4*5, pmt=-125000).
PV in Excel Function Example #3
Suppose you have a future value goal of Rs 25,00,000 to attain from an investment in 20 periods having an interest rate of 2.333%. If the payment is made at the end of each period, the present value can be calculated in such cases using this function as PV(rate=2.333%, nper=20, fv=2500000, type=0).
PV in Excel Example #4
Going back to the previous case where you need to compare two alternative investment plans
- 30,000 monthly for the next 5 years (which is Rs. 18,00,000 in total).
- 25,000 quarterly for the next 20 years (which is Rs. 25,00,000 in total)
Assuming a rate of 6% per annum, the rate per period (1) 6%/12 = 0.5%, (2) 6%*4/12 = 2%.
You get the present value of (1) Rs. 15,51,767 (2) Rs. 10,77,459.
So, you would like to choose the first plan as the present value from the first plan is much larger than the second.
Things to Remember About The PV Function in Excel
- The PV function excel uses a specific order of values (which is the rate, nper, pmt, fv, type) and is separated by “,” If any of the arguments are not provided, pv in excel function can be left blank. As in example 3, it is PV(B4,B5,,B6,0).
- The rate is the interest/return rate per period, which is different from the annual rate.
- PV in excel function allows cash flows either in the beginning or at the end of the period.
- There is constant cash flow and a constant interest rate in the pv excel function.
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This has been a guide to PV Function in Excel. Here we discuss the PV Formula in Excel and how to use PV in Excel along with practical examples and downloadable excel templates.-
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