Question

Discuss how Excel makes calculating Present Value easier. Give at least 2 examples of when present value calculations are used when making financial decisions.

Answer 1

Present value calculation involves a complicated calculation of identifying the value of future cash flow in today's value. It involves calculation of present factor of interest rate with respect to the life of project and then we multiply the pv factor with the future cash flow and some of such cash flow is present value.

Now with the help of excel all the calculation can be done with a single excel excel formula where we simply input the data of cash flows, interest rate and period and the formula will do it work and give us the present value.

The formula is =pv(interest, nper, pmt, fv,type)

Where nper is the life of project, pmt is payment if any or else 0 and type means beggining or end of the period.

So excel makes all the complex calculation very easy and can be done in just one simple formula.

The present value used in financial decisions such as-

1) To identify the acceptance or rejection of the project and generally used in NPV calculation. NPV is the most popular method of calculation where present value of cash inflow is compared with the outflow and then take decision to accept or rejection the project.

2) It also helps in calculating the value of share using DDM method to identify the investing decision in the project or to include it in the company's financial portfolio.