Excel PV Function
last modified April 4, 2025
The PV function calculates the present value of an investment or
loan. It's essential for financial analysis, helping determine current worth
of future cash flows. This tutorial provides a comprehensive guide to using the
PV function with detailed examples. You'll learn basic syntax,
practical applications, and advanced techniques to master this financial
function.
PV Function Basics
The PV function calculates the present value of an investment
based on constant payments and interest rate. It's used for loans, annuities,
and other financial calculations. The syntax includes rate, periods, payment,
future value, and type.
| Component | Description |
|---|---|
| Function Name | PV |
| Syntax | =PV(rate, nper, pmt, [fv], [type]) |
| rate | Interest rate per period |
| nper | Total number of payment periods |
| pmt | Payment amount per period |
| fv | Optional future value (default 0) |
| type | When payments are due (0=end, 1=beginning) |
This table breaks down the essential components of the PV
function. It shows the function name, syntax format, and detailed descriptions
of each argument. Understanding these parameters is crucial for accurate
calculations.
Basic PV Example - Loan Calculation
This example demonstrates calculating the present value of a loan with fixed payments. We'll determine how much can be borrowed based on payment capacity.
| Parameter | Value |
|---|---|
| Annual Interest Rate | 5% |
| Loan Term (Years) | 10 |
| Monthly Payment | $1,000 |
| Present Value | =PV(5%/12, 10*12, -1000) |
The table shows loan parameters and the PV formula to calculate maximum borrowable amount. Note the negative payment value representing cash outflow.
=PV(5%/12, 10*12, -1000)
This formula calculates how much you can borrow with $1,000 monthly payments over 10 years at 5% annual interest. The result is approximately $94,281. Monthly rate is annual rate divided by 12, and periods are years multiplied by 12.
PV Example - Retirement Savings Goal
This example shows how to calculate the lump sum needed today to meet a future retirement goal with regular withdrawals.
| Parameter | Value |
|---|---|
| Annual Return | 6% |
| Retirement Duration | 20 years |
| Annual Withdrawal | $50,000 |
| Required Lump Sum | =PV(6%, 20, 50000, , 1) |
The table illustrates retirement planning parameters. The PV function calculates the present value needed to support $50,000 annual withdrawals for 20 years. Type is 1 as withdrawals occur at period beginnings.
=PV(6%, 20, 50000, , 1)
This formula returns approximately $607,906, the amount needed today to fund 20 years of $50,000 annual withdrawals starting immediately. The empty argument before type skips future value (default 0). Payments are positive as they represent cash inflows to the retiree.
PV Example - Comparing Investment Options
This example compares two investment options by calculating their present values. It helps determine which option provides better value today.
| Option | Annual Return | Term | Future Value | Present Value |
|---|---|---|---|---|
| A | 7% | 5 years | $100,000 | =PV(7%, 5, 0, -100000) |
| B | 5% | 5 years | $100,000 | =PV(5%, 5, 0, -100000) |
The table compares two investments both promising $100,000 in 5 years but with different returns. PV calculations show how much each is worth today, enabling direct comparison.
=PV(7%, 5, 0, -100000) =PV(5%, 5, 0, -100000)
The first formula returns $71,299 (Option A) and the second $78,353 (Option B). Despite same future value, Option A is worth less today because its higher return means you'd need to invest less to reach the same goal.
PV Example - Lease Evaluation
This example evaluates a lease agreement by calculating the present value of lease payments. It helps determine if leasing is better than buying.
| Parameter | Value |
|---|---|
| Monthly Payment | $800 |
| Lease Term | 3 years |
| Discount Rate | 4% annual |
| Residual Value | $5,000 |
| Present Value | =PV(4%/12, 36, -800, 5000) |
The table shows lease terms including monthly payments, term length, discount rate, and residual value. The PV function calculates the equivalent cash value today of all lease obligations and benefits.
=PV(4%/12, 36, -800, 5000)
This formula returns $30,309, representing today's value of 36 $800 payments plus $5,000 residual value at 4% annual discount rate. Negative payment represents cash outflow, while positive residual value is cash inflow at end.
PV Example - Annuity Purchase Decision
This example helps decide whether to purchase an annuity by calculating the present value of its payments compared to its cost.
| Parameter | Value |
|---|---|
| Annual Payment | $10,000 |
| Payment Period | 15 years |
| Discount Rate | 5% |
| Annuity Cost | $100,000 |
| PV of Payments | =PV(5%, 15, 10000) |
The table compares an annuity's cost to the present value of its payments. If PV exceeds cost, the annuity may be worthwhile. Payments are positive as they represent cash inflows to the purchaser.
=PV(5%, 15, 10000)
This formula returns $103,796, the present value of 15 annual $10,000 payments at 5% discount rate. Since this exceeds the $100,000 cost, the annuity appears financially attractive based on these assumptions.
The PV function is powerful for financial decision-making. From
loan analysis to investment comparisons, it helps evaluate time value of money.
Remember that cash outflows (payments) should be negative and inflows positive.
Accurate rate and period matching (annual vs. monthly) is crucial for correct
results.
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