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FV Function Explanation

The document explains the FV (Future Value) function in Excel, detailing its syntax and providing an example calculation for an investment's future value based on a constant interest rate and payment. It also outlines a step-by-step process to determine the required payment for a loan using the Present Value of an Annuity formula, including a breakdown of payments and a cash flow diagram. The required payment per period is calculated to be $402.11 for a loan of $1000 over 3 years at a 10% interest rate.

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54 views3 pages

FV Function Explanation

The document explains the FV (Future Value) function in Excel, detailing its syntax and providing an example calculation for an investment's future value based on a constant interest rate and payment. It also outlines a step-by-step process to determine the required payment for a loan using the Present Value of an Annuity formula, including a breakdown of payments and a cash flow diagram. The required payment per period is calculated to be $402.11 for a loan of $1000 over 3 years at a 10% interest rate.

Uploaded by

WAQAS ASHIQ
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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FV Function Explanation

explain it

The image provides information about the FV (Future Value) function in Excel, which calculates the
future value of an investment based on periodic, constant payments and a constant interest rate.

Explanation of the FV Function:

The FV function syntax in Excel is:

F V (Rate, Nper, Pmt, PV)

Where:

Rate = Interest rate per period


Nper = Number of periods
Pmt = Payment made each period (if any)
PV = Present Value (initial investment, entered as a negative value)

Example in the Image:

F V (0.10, 3, 0, −100) = 133.10

0.10 → 10% interest rate per period


3 → 3 periods (e.g., years)
0 → No additional payments made
-100 → Initial investment (present value of $100)

Calculation:

Using the Future Value formula:

F V = P V × (1 + r)n

F V = 100 × (1 + 0.10)3

F V = 100 × (1.1)3 = 100 × 1.331 = 133.10

Thus, after 3 periods with a 10% interest rate, the investment grows to $133.10.

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This example shows how to use the FV function in Excel to calculate investment growth over time.

solve it step by step and make table and draw

To solve this step by step, we will determine the required payment (PMT) for a loan or investment using
the Present Value of an Annuity formula:

Step 1: Identify Given Information

From the image, we have:

Number of periods (N) = 3


Interest rate per year (I/YR) = 10%
Present Value (PV) = -1000 (initial investment or loan amount)
Future Value (FV) = 0 (the goal is to pay off the loan completely)
PMT = ? (this is what we are solving for)

Step 2: Use the PMT Formula

The formula to calculate the payment for an annuity is:

PV × r
PMT =
1 − (1 + r)−n
​

Where:

PMT = Payment per period


P V = Present Value (-1000)
r = Interest rate per period (10% or 0.10)
n = Number of periods (3)

Step 3: Plug in the Values


−1000 × 0.10
PMT =
1 − (1.10)−3
​

First, calculate (1.10)−3 :

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1 1
(1.10)−3 = 3
= = 0.7513
(1.10) 1.331
​ ​

Now, calculate 1 − 0.7513:

1 − 0.7513 = 0.2487

Now, divide:

1000 × 0.10 100


= = 402.11
0.2487 0.2487
​ ​

Step 4: Interpret the Result

The required payment per period is $402.11.

Step 5: Create a Payment Table

We will create a table showing the breakdown of each payment, including the principal and interest
paid.

Year Beginning Balance Payment Interest (10%) Principal Paid Ending Balance

1 1000.00 402.11 100.00 302.11 697.89


2 697.89 402.11 69.79 332.32 365.57
3 365.57 402.11 36.56 365.55 0.00

At the end of the third period, the balance is $0, meaning the loan is fully repaid.

Step 6: Draw the Cash Flow Diagram

The cash flow diagram would look like this:

markdown

Year: 0 1 2 3
-1000 402.11 402.11 402.11
↓ ↑ ↑ ↑
(Loan) (Payment) (Payment) (Payment)

This means that an initial loan of $1000 is repaid with three equal payments of $402.11 each over 3
years, considering a 10% interest rate.
Would you like me to generate a graphical cash flow diagram for better visualization? 😊

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