How to Calculate Present Value using Excel

In this post you will learn how to use the Present Value function in Excel.

Present Value is a calculation that works out what money in the future is worth now. Say you want to get $110 back in 1 year at a compound interest rate of 10%. The present value would be $100

To get the present value of future money is called discounting and you would discount all future cash flows back to the present point in time. This is basically working backwards from Future value

As with future value calculations in Excel, when you are calculating present value it is very important to make sure all the time periods are consistent. To do this you will need to divide the annual interest rate by the number of compounding periods in the year. Compounding periods will change from investment to investment

The syntax in Excel for present value is

=PV(rate, nperiods, pmt,[fv],[type])

Where :Rate is the Period interest rate

Nperiods is the number of compounding periods

pmt is optional and if pmt is omitted, you must include the fv argument. PMT is the actual payment made each period including capital and interest,

FV is in square brackets indicating this value is optional. It refers to the Future value you wish to discount back to. For example you know you need $30,000 for your child's college in 8 years time. The $30K is the Future Value

Type, which is also in square brackets (meaning this value is optional) defines when in the month the payment is made. 0 or omitted means that payments will be calculated at the end of the period, 1 means that payments are due at the beginning of the period