PV: Calculates the Present Value of a Stream of Cash Flows

PV (Interest Rate, Number of Periods, Payment, [Future Value], [Type])

Example 1: An investment company offers you an annuity of $10,000 per year for the next 20
years. The interest rate is 10%. How much would you be willing to pay for the annuity?
Using Annuity Formula
85135.6372
($85,135.64)
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

Cash Flows
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000

Discount Factor PV of Yearly Cash Flow

0.9091
9090.909091
0.8264
8264.46281
0.7513
7513.148009
0.6830
6830.134554
0.6209
6209.213231
0.5645
5644.739301
0.5132
5131.581182
0.4665
4665.073802
0.4241
4240.976184
0.3855
3855.432894
0.3505
3504.938995
0.3186
3186.308177
0.2897
2896.643797
0.2633
2633.312543
0.2394
2393.920494
0.2176
2176.291358
0.1978
1978.446689
0.1799
1798.587899
0.1635
1635.079908
0.1486
1486.43628

Beginning Balance Interest

Withdrawl
85135.6372
8513.56372
83,649
8364.920092
82,014
8201.412101
80,216
8021.553311
78,237
7823.708642
76,061
7606.079506
73,667
7366.687457
71,034
7103.356203
68,137
6813.691823
64,951
6495.061005
61,446
6144.567106
57,590
5759.023816
53,349
5334.926198
48,684
4868.418818
43,553
4355.260699
37,908
3790.786769
31,699
3169.865446

10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000

By Summing PV of yearly Cash Flow

85135.6372
85,136

Ending Balance
83,649
82,014
80,216
78,237
76,061
73,667
71,034
68,137
64,951
61,446
57,590
53,349
48,684
43,553
37,908
31,699
24,869

18
19
20

24,869
17,355
9,091

2486.851991
1735.53719
909.0909091

10,000
10,000
10,000

17,355
9,091
0

sing Annuity Formula

=10000/0.1*(1-1/(1+0.1)^20)
=PV(10%,20,10000)

y Summing PV of yearly Cash Flows

=SUM(D12:D31)
=NPV(10%,B12:B31)

Example 2: You purchased a car a while ago and are considering paying off the balance as you
are getting your signing bonus today and need to know how large the balance outstanding is.
You are making payments of $325 per month, the yearly interest rate is 6% (compounded
monthly), and you have 42 payments left with the next payment being due later today. What is
the outstanding balance?

FV: Calculates the Future Value of a Stream of Cash flows

FV (Interest Rate, Number of Periods, Payment, [Present Value], [Type])
Example 3: Calculate the future value factor for a yearly interest rate of 10% and a holding
period of 15 years. This is the value of a $1 investment today.

Using FV Factors
Using FV Formula

4.177248 =(1+10%)^15
($4.18) =FV(10%,15,0,1)
$4.18 =FV(10%,15,0,-1)

Example 4: You would like to invest $1,000 per year starting now in an investment which
returns 11% per year. With annual compounding, how much will your investment be worth in 8
years (right before your ninth deposit)?

Example 5: You have $100,000 to invest now and would also like to invest $5,000 for each of
the next five years in an investment which returns 12% per year. With annual compounding,
how much will your investment be worth in 5 years?

Solve for FV
RATE
12%
NPER
5
PMT
5,000
PV
100,000
($207,998.41) =FV(C8,C9,C10,C11)
$

207,998.41 =100000*(1+12%)^5+5000/12%*((1+12%)^5-1)

PMT: Calculates the periodic payment

PMT (Interest Rate, Number of Periods, Present Value, [Future Value], [Type])
Example 6: You are considering borrowing $30,000 to help pay for business school. What will
your yearly payment be if your interest rate is 5% and the repayment period is 20 years?
Amount Borrowing (PV)
Interest Rate (RATE)
Repayment (NPER)

30,000
5%
20

($2,407.28) =PMT(E8,E9,E7)
2407.27762 =30000*5%/(1-1/(1+5%)^20)

Example 7: You plan to retire in 35 years. You want to save enough for retirement that you can
buy an annuity which will pay $50,000 per year. You expect you will live for 20 years after
you retire and you expect you will not be able to save for the first 5 years (i.e. you will save for
30 years). The interest rate is 8%. How much do you need to contribute each year to be able to
fund your retirement plans?

RATE
NPER
PMT
FV

8%
20
50,000
0

($490,907.37) =PV(B9,B10,B11,B12)
RATE
NPER
PV
FV

8%
30
0

RATE: Calculates the interest rate associated with a given periodic payment schedule
RATE (Number of Periods, Payment, Present Value, [Future Value], [Type], [Guess])
Example 8: You are considering buying a car that costs $20,000. The dealer says if you put
$2,000 down, he can provide financing which will make your monthly payment be $325 per
month for 60 months. What is the interest rate the dealer is offering in monthly terms?

NPV: Calculates the Net Present Value of a series of cash flows given a discount rate
NPV (Interest Rate, Series of Cash Flows)
Example 9: You are presented with an opportunity to invest in a project which costs $2,000
now, pays $250 in the first year, pays $500 in years 2-4, and then provides $1000 in the 5th year
after which it is worthless. The discount rate of the project is 10%. What is the net present
value of the project?
Year
0
1
2
3
4
5

Cash Flows
-2000
250
500
500
500
1000

-21.42 =NPV(10%,C11:C15)+C10
9.649% =IRR(C10:C15)

Example 10: You are presented with an opportunity to invest in a project which costs $800,000
now, pays nothing in the first year, pays $200,000 in years 2-5, and then costs $100,000 in the
6th year to refurbish and then pays $200,000 in years 7-10 after which it is worthless. The
discount rate of the project is 10%. What is the net present value of the project?
Year
0
1
2
3
4
5
6
7
8
9
10

Cash Flows
-800000
0
200000
200000
200000
200000
-100000
200000
200000
200000
200000

77753.06 =NPV(10%,C9:C18)+C8

NPER: Calculates the number of periods to achieve an investment goal

NPER (Rate, Payment, Present Value, [Future Value], [Type])
Example 11: You know you can set aside $5,000 per year into investments starting next year. If
your investments grow at 9% per year, in how many years will you have $75,000?
Solve for N (NPER)
RATE
PMT
PV
FV

9%
5000
0
75000
9.914576 =NPER(9%,-5000,0,75000)

Example 12: You made a million dollars by selling your business and have decided that you
want to take some time off from working. The lifestyle you desire requires $125,000 per year to
support and you dont want your savings to fall below $300,000. If the return on your
investments is 6%, how long can you operate before you have to go back to work?