If you hate figures and are not very good with the calculator, then you've come to the right page. In this blog we'll learn how to calculate the present value of an amount without all those complicating formulas that you see in most finance textbooks. All you need to do is to open up a spreadsheet and you're ready. Just follow the step by step instructions on setting up the spreadsheet and you're on your way to working out the figures in a jif. Please note that the following instructions will only work if you follow the steps exactly as it says.
Present Value of a single payment
To calculate the present value of a single payment. Do the following:
1) In an excel spreadsheet , type "Interest Rate Per Year" in Cell A1.
2) In A2, type "No. of Years"
3) In A3, type "Value in the Future"
4) In A5, type "Present Value = "
5) In B5, type "=PV(B1,B2,0,B3)"
Suppose if you will be receiving $20,000 in a year from now and you would like to find out what this value is worth today if you know that the interest rate is 2%. To do this, you have to do the following:
1) Key in 2% in cell B1.
2) Key in 1 in cell B2 for the number of years.
3) In B3, key in -20,000 as the value in the future. This figure has be keyed in as negative for the answer to work.
The present value will be $19,607.84. This is what the $20,000 of the future is worth right now. The final result will look something like this:
Try experimenting a bit by changing the interest rate, amount or number of years and watch the present value figure change. Now wasn't that easy?
Present Value of a series of payments
To work out the present value of a series of payments, do the following:
1) In A1, type "Interest Rate Per Year"
2) In C1, type "(If you're working with months, divide this figure by 12)"
3) In C2, type "(If you're working with months, multiply this figure by 12)"
4) In A2, type "No of Years"
5) In A3, type "Amt Per Payment".
6) In A4, tyep "Arrears/Due"
7) In C4, type "(Key in 0 if payment is made beginning of the period or 1 for end of the period)"
8) In A6, type "Present Value = "
9) In B6, type "=PV(B1,B2,B3,0,B4)"
To illustrate an example, if you have to make a payment of $1000 at the end of each year for the next 5 years with an interest rate of 4% and you would like to know what will the total value of the figure be as at today. Do the following:
1) In B1, type 4%
2) In B2, type 5
3) In B3, type -1000
4) In B4, type 1 because payment is made at the end of the year and not the beginning of the year.
The present value that you will get is $4,629.90. The final answer will look something like this:
Try changing the interest rate or number of years or even the amount per payment to see how the present value changes.
I hope that you find this blog useful. In my next blog, I will cover future values.
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