The Syntax for the PV (Present Value) function is: PV(rate,nper,pmt,[fv],[type])
PV(rate,nper,pmt,[fv],[type])
The arguments for the PV and FV functions are the same except the PV function has an optional FV argument and the FV function has an optional PV argument.
A thousand dollars today is worth more than a thousand dollars in the future unless there is a negative interest. If somebody offered to give you a thousand dollars today or a thousand dollars 5 years from now, which would you prefer? One of the reasons that a thousand dollars today is worth more than a thousand dollars 5 years now is because you could be making interest on the money and have more than a thousand dollars 5 years from now
If the interest rate is 5 percent, then the present value of $100 a year from now would be 100 /1.05 which would be approximately $95. Another words that $95 today has the same value as $100 next year. The concept here is that the present value of a future amount is less than the actual future amount.
The higher the interest rate the lower the present value. Think of it this way as inflation increases how much you can buy with your money decreases. If the interest rate is 10 percent, then the present value of $100 a year from now would be 100 /1.1 which would be approximately $91
Is it better to pay cash for a truck costing $20,000 or is better to make monthly payments for 5 years at $380 a month with an interest rate of 5%.
The value of today’s dollars in paying cash for the truck is $20,000. The value of today’s dollars in paying for the truck through a 5 year loan is $20,136.47. Therefore, we would save $136.47 in today’s dollars if we paid cash.