Interest And Equivalence

Transcript Area

In this Excel tutorial we’ll be taking a look at how to calculate a present value given a single future value. Say for instance, you know in about three years you're going to need a pretty powerful laptop, and you’ve priced them out. You’re hoping the prices stay consistent or go lower, and you figure it’s going to cost you about $2500. Your savings account that you are going to put it in earns 3 percent interest and you need it 3 years from now.

So, what your curious about is how much money do you put away today to have that $2500. To calculate this, you can use your formulas, notice some under the formulas tab. If I don't know what the formula is I can just go insert function and type, present given future, hit return and look and see what the descriptions which one fits. Turns out the PV, present value, is the one I want. Notice it puts my equal sign in and begins my formula. I get this little help box. So, the first thing it asks you for is what is your rate? And you point to what your interest rate is.

Then it asks for Nper, which is your payment periods in your investment, we're waiting for three years to save up. I don't have a payment but I do have a future value that I want of $2500. Notice as I've type these in my help box it's automatically put it into my formula bar. Notice we have parentheses B3 comma B4 since I didn't use payment it does comma comma which means I skip that and B2. Since that's all the information I have, I can close with parentheses and be done with this and hit okay.

What this tells you is it's red which means that's a negative number, which means in terms of your cash flow diagram an arrow down means money leaves, so you have to deposit money somewhere to get the positive $2500 of the future. So it's money leaving, money coming back. If this bothers you that you’re seeing a negative number here you can trick this by simply just putting a negative sign in front of your future value. Apparently I put it in the wrong spot, so hang on. There. And you'll get a number that looks positive. So just remember when you're seeing things that have a negative or positive think about what your cash flow diagram looks like.

It was an arrow down to have a future up. Now if you're getting better at this, we can just take this out and you know that its equals, the formula is PV, you can put equal which means I'm starting a calculation PV and start your parentheses. Notice the same information that was in your help box is coming across your formula bar and notice its hyperlinked, did you see that? So the first thing it asked for his rate, that's what's bolded, so I simply select B3 comma.

Then it tells me oh! Now I need to know, notice the Nper was bolded and I hit 3, when I hit the comma, it moves me to payment, didn't have one so I just simply do comma again. Notice it now bolded future value. Here we go. And I don't have any more information so I can simply close the parentheses and I get the same calculation again.

So, remember, you can either look for a function and search for it in your Excel or if you already know it equals present value, then you can simply put equals PV and then it will help you with the formula bar to see what you're doing. So try it both ways and see how it works. In this video we’ve show you how to I’ve shown you how to do a present value given a single future.