A:

Present value is the current value of an expected future stream of cash flow. The concept is simple. For example, assume that you aim to save $10,000 in a savings account five years from today and the interest rate is 3% per year. You would need to figure out how much is needed to invest today, or the present value. The formula for present value is PV = FV ÷ (1+r)^n; where FV is the future value, r is the interest rate and n is the number of periods. Using information from the above example, PV = 10,000÷(1+.03)^5, or $8,626.09, which is the amount you would need to invest today.

On Microsoft Excel, there is a built-in function to find the present value, given the required arguments. For example, if you expect to have $50,000 in your banking account 10 years from now, with the interest rate at 5%, you can figure out the amount that would be invested today to achieve this. Using Excel, enter "Year" in cell A1. From cells B1 to L1, enter years 0 to 10. In cell A2, enter "Interest Rate" and enter 5% for all cells from C2 to L2. Now in cell A3, enter “Future Value” and $50,000 into cell L3. The built-in function PV can easily calculate the present value with the given information. Enter "Present Value" into cell A4, then select cell L4 and enter "=PV(L2, L1, 0, L3)." Since this is not based on payments, 0 is used for the pmt argument. The present value is calculated to be ($30,695.66), since you would need to put this amount into your account; it is considered to be a loss.

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