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Excel Tutorials | Future Value vs. Present Value in Finance

In finance, to understand the value of money one needs to travel between different time periods. When we do this, the idea to keep mind is that the capital has different price in the present and in future. For that, we use the notions of the present value and the future value to describe compounding and discounting in finance.


Excel Tutorials for Finance | Discounting (PV Excel function) and Compounding (FV Excel function) in MS Excel
Excel Tutorials for Finance | Discounting (PV Excel function) and Compounding (FV Excel function) in MS Excel

Compounding vs. Discounting in Finance

In order to move a cash flow forward in time, we need to compound it, i.e. apply the compound interest so as to see how much having a cash flow today will cost us in future. Should we want to see how much a cash flow in future would cost us today, we need to carry out the inverse operation – discounting – helping us to move a cash flow backward in time.

There is the so-called Cash Flow Convention. According to it, the outgoing payments from our perspective are represented by negative numbers and, consequently, incoming payments are represented by positive numbers.

Compounding -> FV Excel | Future Value of a Cash Flow in the Present


The process of moving a cash flow forward in time is called compounding. In MS Excel, we use the Excel FV function .Therefore, to find the future value of a cash flow we need to compound it in the following way: 

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Discounting -> PV Excel | Present Value of a Cash Flow in the Future

If we want to see how much a cash flow in the future will cost us today, we discount it. In MS Excel, we use the Excel PV function. That operation helps us to find the present value of a cash flow:


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The r, interest rate, leads us in time by means of FV Excel and PV Excel functions. Hence we can consider it as the time preference rate. 

Exercises in Excel for finding the present and the future value


In MS Excel, there are functions for the future and present value respectively.

The PV Excel Function (in English, French and German)

        
English                    French                   German
PV VA BW

The FV Excel Function (in English, French and German)

English                     French                    German
FV VC ZW






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