Question

Explain the use of the PV (Present Value) function in Computerised Accounting. How is it applied in MS Excel to calculate the present value of future payments ? Write the formula to calculate present value of Rs 20,000 paid annually for the repayment of a loan for 10 years at an interest rate of 9%.

Hint:

PV gives the present value of fixed future payments. Syntax is PV(rate, nper, pmt, fv, type), so here write =PV(9%, 10, -20000).

Answer 1

Step 1: Meaning and use of the PV function:
The PV function returns the present value of an investment. Present value is the total amount that a series of future payments is worth today.
It is helpful in evaluating loans, investments or savings that have fixed payments.

Step 2: Application in MS Excel:
The user types the function in a cell with the syntax PV(rate, nper, pmt, fv, type). The arguments are:

Argument	Meaning
rate	Interest rate per period
nper	Total number of payment periods in the annuity
pmt	Payment made each period, which cannot change over the life of the annuity
fv	Future value, or cash balance wanted after the last payment (optional)
type	0 or 1, shows when payments are due (optional)

Fv and type are optional. If they are left out, Excel takes fv as 0 and type as 0, which means the payment is due at the end of each period.

Step 3: Data of the given case:
Annual payment = Rs. 20,000, number of years = 10, interest rate = 9% per year.
So rate = 9%, nper = 10 and pmt = -20,000. The payment is written with a minus sign because it is cash paid out, and then Excel shows the present value as a positive figure.

Step 4: Formula:
The formula typed in the cell is =PV(9%, 10, -20000).
The output of this formula is the present value of the ten payments. By the annuity formula, 20,000 x (1 - 1.09 raised to -10) / 0.09, it comes to about Rs. 1,28,353.

Final Answer:
The PV function gives the present value of a series of equal future payments. The formula for the given loan is =PV(9%, 10, -20000), which shows a present value of about Rs. 1,28,353 (6 marks).