5. Excel For Finance Tips - What is Present Value ?
In our previous tip on Future Value, we learnt that you could take an amount today, and grow it by an interest rate, and that it would be larger in the future... we called that amount in the future "Future Value", and we proved that the FV excel function was doing just that.
The definition of Present Value is now easy. It's what we called "Amount Now" I have renamed the headings on our calculation sheet, and entered a simple example. In this example, we start off with 100. We then grow it by 10% for 2 years and it ends up at 121. We then take that 121, and ask the question:
- If we grow an amount (the present value) by 10% for 2 years to end up with 121, what was the amount we started with ?
This screen shot shows the formula used to calculate that:
Download spreadsheet which shows you that Present Value and Future Value are linked by 2 things - 1. Interest Rates, and 2. Time. The spreadsheet shows manual calculations for the Excel functions: PV and FV, and reconciles them
Training Video on Present Value: