PV Function
PV Function is used for calculating the present value of a future amount of money. As discussed in Time Value of Money, value of an amount of Money changes over time. PV Function helps us for calculating how much a future amount money costs today.
Snytax for PV Function:
PV(rate;Nper;Pmt;FV;Type)
PV – Present Value
rate – Interest Rate
Nper – Payment Periods
Type – 1 if payment is at the beginning of the period, 0 if payment is at the end of the period
You need to provide first 3 variables in order PV() Function to work. Last 2 variables are optional.
Example1:
John put his car on sale for 11,500$. Max offers him 1000$ payments in the beginning of each month for 12 consecutive months. Is this deal profitable for John? (assuming annual interest rate is 15%)
Our formulation with PV Function for this deal is:
PV=(15%/12 ; 12 ; -1000$ ; 0 ; 1) = 11,218$
So 1000$ monthly payments for 12 months is equal to todays 11,218$ which is 282$ less then John’s targeted price. John should either demand 11,500$ now or higher monthly payment. Because current offer is not in his favor.
Example2:
Jane sells her car for 14,000$. Max makes an offer on her car for 1000$ monthly payments for 12 months and 4000$ additional payment at the end of 12 months. (assuming annual interest rate is 15%)
Our formulation with PV Function for this deal is:
PV=(15%/12 ; 12 ; -1000$ ; -4000$ ; 0) = 14,525$
1000$ monthly payments for 12 months plus 4000$ one time payments after 12th month equals todays 14,525$ which is 525$ higher than Jane’s target price. So Jane can accept this deal if she is not in need of immediate money.
