Musiha Mahfuza Mukta
At present, it is very important to know the calculation of Present Value of Future Cash Flows. If you want to invest somewhere, or you want to save money in every step you should know the Present Value of Future Cash Flows. So, in this article, I will show you how to calculate the Present Value of Future Cash Flows.
Download Practice Workbook
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What Is Present Value of Future Cash Flows?
Present Value (PV) of Future Cash Flows is a process of discounting the cash which you expect to get in the future with a value of the current time. The Present Value may be greater than future cash flows or vice versa. Furthermore, the Present Value is less than the future cash flow for inflation.
4 Methods to Calculate Present Value of Future Cash Flows
To explain the 4 methods on how to calculate the Present Value of Future Cash Flows in Excel, I will use the following dataset. Which has Discount Rate, Time Period, and Future Cash Flow.
1. Use of PV Function to Calculate Present Value of Future Cash Flows
Here, you can use the PV function to calculate the Present Value of Future Cash Flows. The steps are given below.
Steps:
- Firstly, you need to select a different cell D6 where you want to calculate the Present Value.
- Secondly, use the corresponding formula in the D6 cell.
=PV($C$4,B6,0,C6)
Formula Breakdown
Here, the PV function will return the Present Value of an investment.
- C4 denotes rate as the annual interest rate. The Dollar ($) sign denotes that the value of the C4 cell is fixed.
- B6 denotes NPER as the total period of time.
- As there is no Payment so PMT will be 0.
- C6 denotes FV as the Future Cash Flow.
- Now, press ENTER to get the Present Value.
Here, the Minus sign denotes that you need to keep this amount at any monetary institute.
- After that, you have to drag the Fill Handle icon to AutoFill the corresponding data in the rest of the cells D7:D10.
At this time, you will see the following result.
- Â Now, you have to select the data range. Here, I have selected D5:D10.
- Then, from the Home tab >> you should go to the Number feature.
- After that, in the Number feature >> Click on the Drop-Down Arrow >> At this time, you need to choose Currency.
- Finally, from the Number feature >> you need to Click two times on Decrease Decimal to decrease the decimal.
- Now, you need to press the CTRL+1 keys to open the Format Cells dialog box directly.
Also, you can use the Context Menu Bar or the Custom Ribbon to go to the Format Cells command.
- Â First, select the data range >> Right-Click on the data >> choose the Format Cells option.
In the case of using Custom Ribbon,
- Select the data range >> from the Home tab >> go to the Format feature >> choose the Format Cells command.
After that, a dialog box named Format Cells will appear.
- Now, from that dialog box, you have to make sure that you are on the Number command.
- Then, you need to go to the Currency option.
- At this time, choose the second option from the Negative numbers option.
- Finally, press OK.
Furthermore, to get the total Present value, I will use the SUM function.
- Firstly, you need to select a different cell D11 where you want to calculate the total Present Value.
- Secondly, use the corresponding formula in the D11 cell.
=SUM(D6:D10)- Finally, press ENTER.
Here, the SUM function will return the summation of the data range D6:D10. At last, you will get the following Present Value.
Read More: How to Apply Discounted Cash Flow Formula in Excel
2. Applying NPV Function for Calculating Present Value
You can apply the NPV function to calculate the Present Value of Future Cash Flows. The steps are given below.
Steps:
- Firstly, you need to select a different cell C11 where you want to calculate the Present Value.
- Secondly, use the corresponding formula in the C11 cell.
=NPV(C4,C6:C10)
Formula Breakdown
Here, the NPV function will return the net present value of an investment.
- C4 denotes the discount rate. Which is 5%.
- C6:C10 denotes the series of FV as the Future Cash Flows.
- Now, press ENTER to get the Net Present Value.
Read More: How to Calculate Future Value of Uneven Cash Flows in Excel
Similar Readings
- How to Calculate Payback Period in Excel (With Easy Steps)
- Cash Flow Statement Format in Excel for Construction Company
- How to Calculate Present Value in Excel with Different Payments
- How to Calculate IRR in Excel for Monthly Cash Flow (4 Ways)
3. Employing Generic Formula to Calculate Present Value of Future Cash Flows
You can employ the generic formula to calculate the Present Value of Future Cash Flows.
Steps:
- Firstly, you need to select a different cell D6 where you want to calculate the Present Value.
- Secondly, use the corresponding formula in the D6 cell.
=C6/((1+$C$4)^B6)
Formula Breakdown
- Here, C4 denotes rate as the annual discount rate. The Dollar ($) sign denotes that the value of C4 cell is fixed.
- Firstly, I have added 1 with the discount rate.
- Output: 1.05.
- Secondly, the Power (^) sign raises it to a fixed power which is the value of B6 cell. Also, that is the time period.
- Output: 1.05.
- Finally, I divided the C6 cell value by 1.05.
- Output: $3,809.52.
- Now, press ENTER to get the Present Value.
- After that, you have to drag the Fill Handle icon to AutoFill the corresponding data in the rest of the cells D7:D10.
Furthermore, to get the total Present Value, I will use the SUM Function.
- Firstly, you need to select a different cell D11 where you want to calculate the total Present Value.
- Secondly, use the corresponding formula in the D11 cell.
=SUM(D6:D10)- Finally, press ENTER.
Here, the SUM function will return the summation of the data range D6:D10. Lastly, you will get the following Present Value.
Read More: How to Calculate Future Value of Uneven Cash Flows in Excel
4. Using Generic Formula for Compound Interest
You can employ the generic formula to calculate the Present Value of Future Cash Flows in the case of Compound Interest. Let’s have the following data set.
The steps are given below.
Steps:
- Firstly, you need to select a different cell C9 where you want to calculate the Present Value.
- Secondly, use the corresponding formula in the C9 cell.
=C4/((1+C5/C7)^(C6*C7))
Formula Breakdown
- Here, C5 denotes rate as the annual discount rate.
- Firstly, I have divided the cell value of C5 by Compounding year or C7 cell value.
- Output: 0.016666667.
- Secondly, I have added 1 with the result.
- Output: 1.016666667.
- Thirdly, I have multiplied C6 with C7.
- Output: 15.
- Fourthly, the Power (^) sign raises it to a fixed power.
- Output: 1.281382444.
- Finally, I divided the C4 cell value by the output.
- Output:$13,423.00 .
- Now, press ENTER to get the Present Value.
Read More: How to Calculate Present Value of Uneven Cash Flows in Excel
💬 Things to Remember
- Try to avoid generic formulas as there are built-in functions to calculate the Present Value of Future Cash Flows.
Practice Section
Now, you can practice the explained method by yourself.
Conclusion
I hope you found this article helpful. Here, I have explained 4 methods to Calculate Present Value of Future Cash Flows. You can visit our website Exceldemy to learn more Excel-related content. Please, drop comments, suggestions, or queries if you have any in the comment section below.
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