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Excel Video 142 starts our discussion of financial functions in Excel with a function called PV. PV stands for present value, the total amount that a series of future payments is worth today. The financial functions I’m discussing in these videos are the subject of an undergraduate level finance class in business school. Please don’t use these videos to loan money or make investments. The details of the financial calculations are beyond the scope of these videos, but I do want you to understand how the financial functions work in Excel.
That said, present value requires at least three pieces of information, the interest rate, the number of periods (months, years, etc.), and the amount of the payment. You can also add any future value at the end of the term of payments and whether the payments are made at the end of the period, as is common with loans, or the beginning of the period, as is common with leases. The key here is to make sure that if the periods are monthly, the interest rate is also monthly. The periods and the interest rate have to match for Excel to get the present value calculations correct.
Excel offers a variety of financial functions. For example, if you know the present value (the amount of a loan), the interest rate, and the number of payments, there’s a function to calculate the amount of the payment. The function is called PMT. We’ll look at that next.