- SPREADSHEET SOLUTION
66 CHAPTER 2 Time Value of Money
ABCDEFG
1 Interest rate 0.05
2 Time 01234 5
3 Cash flow 0 0 0 0 127.63
4 Present value 100
You could enter the spreadsheet version of Equation 2–3 in Cell B4, 127.63/
(10.05)ˆ5,but you could also use the built-in spreadsheet PV function. In Excel,you
would put the cursor on Cell B4, then click the function wizard, indicate that you
want a Financial function, scroll down, and double click PV. Then, in the dialog
box, enter B1 or 0.05 for Rate, G2 or 5 for Nper, 0 for Pmt (because there are no
annual payments), G3 or 127.63 for Fv, and 0 (or leave blank) for Type because
the cash flow occurs at the end of the year. Then, press OK to get the answer,
PV $100.00. Note that the PV function returns a negative value, the same as the
financial calculator.
Graphic View of the Discounting Process
Figure 2-2 shows how the present value of $1 (or any other sum) to be received in the
future diminishes as the years to receipt and the interest rate increase. The graph
shows (1) that the present value of a sum to be received at some future date decreases
and approaches zero as the payment date is extended further into the future, and (2)
that the rate of decrease is greater the higher the interest (discount) rate. At relatively
high interest rates, funds due in the future are worth very little today, and even at a
FIGURE 2-2 Relationships among Present Value, Interest Rates, and Time
Present Value of $1
0 2 4 6 810
0.25
0.50
0.75
1.00
i = 15%
i = 10%
i = 5%
i = 0%
Periods
64 Time Value of Money
