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What Is The PV Function

The PV function in Excel calculates the present value of an investment or loan given periodic payments and a fixed interest rate. It takes in the interest rate, number of payment periods, payment amount, optional future value, and whether payments are made at the start or end of periods. The PV function is useful for calculating things like the original loan amount or how much to save each period to reach a future investment goal. It is important to properly convert annual rates to monthly or quarterly for the frequency of payments.

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79 views6 pages

What Is The PV Function

The PV function in Excel calculates the present value of an investment or loan given periodic payments and a fixed interest rate. It takes in the interest rate, number of payment periods, payment amount, optional future value, and whether payments are made at the start or end of periods. The PV function is useful for calculating things like the original loan amount or how much to save each period to reach a future investment goal. It is important to properly convert annual rates to monthly or quarterly for the frequency of payments.

Uploaded by

Jealousy Marumisa
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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What is the PV Function?

The PV function is categorized under Financial functions. It will calculate the present value
of an investment or a loan taken at a fixed interest rate.

In financial statement analysis, PV will help calculate the value in today’s dollars of a series
of future payments, assuming periodic, fixed payments and a fixed interest rate. The function
can be used to calculate the present value with constant payments, or a future value, or the
investment goal of the business.

Formula

=PV(rate, nper, pmt, [fv], [type])

The PV function uses the following arguments:

1. Rate (required argument) – It is the interest rate per period. For example,


if we take a business loan at 12% annual interest rate and make monthly
payments, our interest rate per month is 12%/12, or 0.10%. we would enter
12%/12, or 0.10%, or 0.01, into the formula as the rate.
2. Nper (required argument) – It is the total number of payment periods in an
annuity. For example, for year loan and make monthly payment then the
loan would have 60 periods. So NPER to be entered would be 60 months.
3. Pmt (required argument) – It is the payment that is made for each period
and cannot be changed over the life of the annuity. PMT includes Principal
& taxes but excludes fees or taxes if any.
4. Fv (optional argument) – It is the Future value of the investment or cash
balance which we wish to attain. If fv is omitted, it is assumed to be 0. For
example, if we want to save $500,000 to pay for a special project in 18
years, then $500,000 is the future value. We could then make a
conservative guess at an interest rate and determine how much we must
save each month. If fv is omitted, we must include the pmt argument.
5. Type (optional argument) – The number 0 or 1 indicates when payments
are due. If type is equal to 0 or omitted, payments are due at the end of the
period. If set to 1, payments are due at the start.

Notes

1. Annuity is a series of constant cash payments made over a continuous


period. For example, a car loan or a mortgage is an annuity.
2. In annuity functions, cash that we pay out, such as a deposit to savings, is
represented by a negative number; cash that we receive, such as a dividend
check, is represented by a positive number.
 

How to use the PV Function in Excel?

To understand the uses of the PV function, let us consider a few examples:

Example 1

Suppose we are given the following data:

The formula used is:

 
 

We get the result below:

A loan comprises four primary components: the loan amount, the interest rate, the number of
periodic payments (the loan term) and a payment amount per period. We can use the PV
function to calculate the original loan amount when given the other three components.

Example 2

In the example below, the PV function is used to calculate the present value of an annuity that
pays $5,000 per quarter for a period of 5 years. The interest is 10% per year and each
payment is made at the start of the quarter.

 
 

The formula used is:

We get the result below:

Things to remember about the PV Function 


1. #VALUE! error – Occurs if any of the given arguments is non-numeric.
2. One common error in using the PV function is not converting the annual
interest rate into a monthly rate or quarterly rate, or as payments are made.
If omitted, it can result in an error.

Click here to download the sample Excel file

Additional resources

Thanks for reading CFI’s guide to important Excel functions! By taking the time to learn and
master these functions, you’ll significantly speed up your financial modeling and analysis. To
learn more, check out these additional resources:

 Excel Functions for Finance


 Types of Graphs in Excel
 All Excel Resources
 Certified Financial Analyst

Free Excel Tutorial

To master the art of Excel, check out CFI's FREE Excel Crash Course, which teaches you
how to become an Excel power user.  Learn the most important formulas, functions, and
shortcuts to become confident in your financial analysis.  
Launch CFI’s Free Excel Course now to take your career to the next level and move up the
ladder!

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