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Calculating present value

From: Excel 2007: Financial Analysis

Video: Calculating present value

Calculating the present value of an investment enables you to answer this question: how much is a proposed investment worth in today's dollars? You can answer that question using the PV or Present Value function. The PV function has five arguments Rate, NPER, PMT, FV, and Type. Rate is the discount rate, which I'll explain in a moment. NPER is the number of periods. PMT or payment is the amount of money deposited into the investment each period.

Calculating present value

Calculating the present value of an investment enables you to answer this question: how much is a proposed investment worth in today's dollars? You can answer that question using the PV or Present Value function. The PV function has five arguments Rate, NPER, PMT, FV, and Type. Rate is the discount rate, which I'll explain in a moment. NPER is the number of periods. PMT or payment is the amount of money deposited into the investment each period.

In other words, if you have a one year investment and you make monthly contributions of $1,000, that would be the PMT value. FV is the value of the investment when it reaches maturity, and the Type indicates whether the payments are due at the end of a period in which case, the value is zero, or you can leave it out, or at the start of the period in which case you put in the value of one. If you are more comfortable seeing all of the values as positive numbers, you can multiply the result of the PV formula by -1. As an example, consider a one year investment where you are asked to pay $9,500 for a return of $10,000 after 12 months.

If you assume you can generate 6% return from risk-free investments, you would create this formula in cell B7. That is =PV for present value, B3, the rate, divided by 12, because we are assuming interest is compounded monthly. B4, the number of periods, but B4 is the number of years, so we need to multiply it by 12, again to account for the number of months. We are not making any payments, so we'll leave the payment argument blank, and we have a target future value of $10,000, which is cell B5.

And we can leave the Type argument blank because we are assuming that all payments will be at the beginning of the period. When we press Return, we see that the present value is $9,400.05. And again, because this calculation represents a cash flow from you as opposed to you, it's expressed as a negative value. So the present value of this investment is $9,400.05, because the asking price is greater than the investment's present value. You should pass on the opportunity.

Evaluating an investment using the Present Value function makes your decisions easier. Once you establish a discount rate, which you and your colleague should reevaluate frequently to account for changes in the market, you can run the numbers and arrive at a clear yes or no decision.

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Excel 2007: Financial Analysis

51 video lessons · 13989 viewers

Curt Frye
Author

 
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  1. 2m 6s
    1. Welcome
      1m 8s
    2. Using the exercise files
      32s
    3. Disclaimer
      26s
  2. 13m 20s
    1. Separating inputs and formulas
      2m 2s
    2. Avoiding common mistakes
      5m 39s
    3. Tracing formula precedents and dependents
      2m 52s
    4. Evaluating Excel formulas step by step
      2m 47s
  3. 18m 40s
    1. Tracking income and expenses using an Excel table
      3m 29s
    2. Creating a Pivot Table from table data
      3m 36s
    3. Pivoting a Pivot Table
      2m 22s
    4. Filtering a Pivot Table
      3m 11s
    5. Adding Pivot Table columns to enhance data analysis
      3m 5s
    6. Tracking cash flow using a Pivot Chart
      2m 57s
  4. 18m 48s
    1. Reading a corporate financial statement
      6m 1s
    2. Introducing common-sizing strategies for analyzing financial statements
      3m 59s
    3. Creating common-sized income statements
      3m 1s
    4. Creating common-sized balance sheets
      2m 53s
    5. Calculating percentage changes in financial statements
      2m 54s
  5. 8m 12s
    1. Calculating earnings per share
      1m 54s
    2. Calculating return on equity and return on assets
      2m 50s
    3. Calculating gross profit margin and net profit margin
      3m 28s
  6. 6m 19s
    1. Calculating the current ratio and quick ratio
      2m 47s
    2. Calculating the average collection period
      1m 56s
    3. Calculating inventory turnover
      1m 36s
  7. 6m 12s
    1. Calculating the equity ratio
      1m 26s
    2. Calculating the debt ratio
      2m 57s
    3. Calculating the times interest earned ratio
      1m 49s
  8. 10m 58s
    1. Calculating simple interest and compound interest
      3m 36s
    2. Applying nominal versus effective interest rates (APR versus APY)
      3m 21s
    3. Calculating the number of days between events
      4m 1s
  9. 13m 32s
    1. Computing the future value of an investment
      3m 30s
    2. Calculating present value
      2m 29s
    3. Calculating net present value
      2m 42s
    4. Calculating internal rate of return
      2m 24s
    5. Calculating NPV and IRR for uneven input periods (XNPV and XIRR)
      2m 27s
  10. 7m 30s
    1. Projecting future results using the Forecast function
      2m 9s
    2. Performing quick forecasts using the Fill handle
      2m 57s
    3. Adding a trendline to a chart
      2m 24s
  11. 22m 28s
    1. Introducing amortization
      2m 20s
    2. Calculating payments on a fully amortized loan
      2m 21s
    3. Calculating payments on a partially amortized loan (balloon payments)
      2m 4s
    4. Calculating interest and principal components of loan repayments
      5m 32s
    5. Introducing depreciation
      2m 1s
    6. Calculating straight line depreciation
      1m 30s
    7. Calculating declining balance depreciation
      3m 24s
    8. Calculating double declining balance depreciation
      3m 16s
  12. 9m 34s
    1. Introducing bonds and bond terminology
      1m 37s
    2. Calculating a bond's yield
      2m 15s
    3. Calculating the value of zero coupon bonds
      3m 18s
    4. Pricing bonds to be offered to investors
      2m 24s
  13. 23s
    1. Goodbye
      23s

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