Financial Functions: PV Function

• You are buying a copier. Would you rather pay $11,000 today or
$3,000 a year, at the end of each year, for five years? Assume the
cost of capital is 12%.
• Using the PV function:
• =PV(rate,#per,[pmt],[fv],[type])
• Rate must be consistent with #per.
• #per is the number of payments.
• Pmt (payments): A payment has a negative sign (-$3,000).
• Fv (future value): cash balance after you make the last payment.
• Type: if 0 that means payments are made at the end of the time
unit, if 1 at the beginning.
• =pv(0.12,5,-3000,0,0) or =pv(0.12,5,-3000)=$10,814.33
• It is a better deal to make payments at the end of the year than to
pay out $11,000 today.

• Scenario 2:
• You are buying a copier. Would you rather pay $11,000 today or
$3,000 a year, at the beginning of each year, for five years?
Assume the cost of capital is 12%.
• =pv(0.12,5,-3000,0,1)=$12,112.05
• It is a better deal to pay $11,000 today than make payments at the
beginning of the year.
• Scenario 3:
• You are buying a copier. Would you rather pay $11,000 today or
$3,000 a year, at the end of each year, for five years? You must
include an extra $500 payment at the end of year 5. Assume the
cost of capital is 12%.
• =pv(0.12,5,-3000,-500,0)=$11,098.04
• It is a better deal to pay $11,000 today.

• Scenario 4:
• What if they asked for $300 extra at the end of year 5?
• =pv(0.12,5,-3000,-300,0)=$10,984.56
• Better to pay $3,000 at the end of each year and include $300 at
the end of year 5 than pay $11,000 today.
 Financial Functions: FV Function
• If at the end of each of the next 40 years, I invest $2,000 a year
toward my retirement and earn 8% a year on my investments,
how much will I have when I retire?
• =FV(rate,#per,[pmt],[pv],[type])
• Pmt: payment made each period (-$2,000).
• Pv: amount of money owed right now.
• If we owe $100 to some one pv=$100.
• If we have $100 in the bank, then pv=-$100
• =fv(8%,40,-2000,0,0)=$518,113.04 or =fv(8%,40,-2000) or
=fv(0.08,40,-2000)
• Scenario 2:
• If at the end of each of the next 20 years, I invest $2,000 a
year toward my retirement and earn 5% a year on my
investments, how much will I have when I retire?

• =fv(5%,20,-2000)=$66,131.91
 Financial Functions: Rate Function
• I want to borrow $80,000 and make monthly payments for 10
years. The maximum monthly payment I can afford is $1,000.
What is the maximum interest rate I can afford?
• =rate(#per,pmt,pv,[fv],[type])
• Type 0 = end of month payments.
• =rate(120,-1000,80000,0)=0.7241% monthly
 Financial Functions: NPER Function
• If I borrow $100,000 at 8 percent and make payments of $10,000
per year, how many years it will take me to pay back the loan?
• =nper(rate,pmt,pv,[fv],[type])
• =nper(8%,-10000,100000)=20.91 years

• Scenario 2:
• If I borrow $100,000 at 8 percent and make payments of
$10,000 per year, how many years it will take me to pay back
the loan supposing you are planning to pay back $40,000?
• =nper(8%,-10000,100000,-40000)=15.90 years
 Depreciation
• Depreciation is the reduction in the long-lived assets from use.
• Commonly used methods for computing depreciation:
• Straight Line depreciation (SLN)
• Sum-of-years’ digits depreciation (SYD)

• Let’s consider a new machine that is worth $15,000 and over 5

years will be depreciated to a final (or salvage value) of $3,000.
The question is how the various depreciation methods allocate
$15,000 - $3,000 = $12,000 of depreciation over 5 years.
• SLN: depreciates the machine’s value an equal amount during
each year.
• =SLN(cost,salvage_value,years)
• =sln(15000,3000,5)=$2,400 per year

• SYD method loads more of the depreciation to early years.

• =SYD(cost,salvage_value,years,per)
• =syd(15000,3000,5,1)=$4,000
• =syd(15000,3000,5,2)=$3,200