PV Tutorial: Suppose you can buy a truck today for $75,000 that will be useful for 10 years at which

time it will have no scrap value. Each year you will receive net revenues from the truck of $10,000; the
first payment will occur one year from today. Suppose the interest rate you face is 5%. Should you
purchase the truck? Explain. This is easiest to follow if you print this page.

Steps involved (These steps refer to the PV Tutorial worksheet). You should try to do this on your own worksheet (this is
labeled your worksheet).
1 Type in descriptions of the data in cells A1-3.
2 Widen the A column by double clicking on the A|B border in the gray part of the worksheet above the first row.
3 Type in data in cells B1-3.
4 Format the data in B1-3 using either the buttons on the formatting toolbar ($, % and decrease decimal buttons) or the
Format Cells pulldown menu.
5 Decide where you want the calculation area to begin (I chose having the first calculations start in row 10 because the last
digit of the year and row number then will match).
6 Type in column descriptions for the PV problem. (The four column titles are not the only ones you could have used to
do this problem. They do provide a nice way of keeping track of most present value calculations.)
7 Create the time counter (see cells A10 and A11).
8 Drag the time counter down to A20 (for 10 years). Dragging involves clicking on the cell and placing the mouse over
the bottom right corner of the cell to obtain a black + sign, then left click and pull the mouse down.
9 IMPORTANT: All cells in A10:D20 except A10 itself look like numbers are entered, but in actuality, each number is
based on an equation that involves the base data (cells B1:B3 in this example) or calculations based on that data.
Setting up the problem this way is the only way to harness the power of Excel to do "what if" calculations.
Equations are created by starting with an = sign.
10 Put up front cost in B10 (make sure you treat it as a cost, not a benefit). This equation is =-B1.
11 Put $10,000 in B11 using the equation =B2.
12 Drag B11 down to B20 signifying 10 yearly payments of $10,000.
13 In all likelihood, you will now have a problem, as your cell B12 will now have the equation =B2; B13 will have the
equation =B3; etc. You wanted all cells from B11 to B20 to be equal to B2. This is accomplished by changing the cell
referencing from relative to absolute in cell B11. For a short tutorial on relative versus absolute referencing, see the
Referencing worksheet.
14 Adjust the equation in B11 so that you can drag it down to B20 and have $10,000 in each cell.
15 In cell C10, write an equation for the present value of the dollars received (or paid out) in year zero using the equation in
the text box. This equation will have to refer to cells B10, B3 and A10. Consider as you create this equation what parts
of the equation you want absolute, and what parts you want relative referenced.
16 Drag C10 down to C20. Make sure the numbers match the ones provided. If not, you probably have a problem with
relative versus absolute referencing.
17 Net PV is the sum of monies received in each year, all on a present value basis. I like to set this up in a separate column,
rather than simply adding the PV's in each year. To do this, simply add the previous year's sum to the PV in that year.
For example, in year 1, cell D11=D10+C11. (You must initialize the calculation by setting the NPV in the first time
period equal to PV in that time period. This is done in cell D10.)
18 Drag cell D11 down to D20. Use the number in Cell D20 to answer the initial question: should you buy the truck?
19 Test your worksheet by changing some of the parameters in cells B1:B3 on your worksheet and on the PV Tutorial
worksheet. Make sure you get the same numbers on your worksheet as the PV Tutorial worksheet.
20 Test your understanding of PV (and your worksheet) by answering the questions posed on the Q&A worksheet.

If you have problems making your worksheet work like the PV Tutorial worksheet, you likely have at least one of the
following problems: cell referencing problems; typing in values rather than referencing them; order of operation
problems -- make sure your parentheses are in the right places.

The only difference when working with multiple time periods in a year is that the PV formula changes
slightly. Pages A-5 and A-6 in Appendix A discuss the calculation of PV in this situation. I would like
to provide one extra formula: The PV of Xt dollars paid in period t, given annual interest rate i and c
time periods per year is:
PV = Xt/(1+i/c)t
Cost in period zero $ 75,000
revenues per year $ 10,000
Interest rate 5%

The equation for the Present Value of Xt dollars paid in year

t if the discount rate is i is (eq. A.2, p. A2):
PV = Xt/(1+i)t
Benefit or PV B/C in Net PV in
Year cost in year year year
0 $ (75,000) $ (75,000) $ (75,000)
1 $ 10,000 $ 9,524 $ (65,476)
2 $ 10,000 $ 9,070 $ (56,406)
3 $ 10,000 $ 8,638 $ (47,768)
4 $ 10,000 $ 8,227 $ (39,540)
5 $ 10,000 $ 7,835 $ (31,705)
6 $ 10,000 $ 7,462 $ (24,243)
7 $ 10,000 $ 7,107 $ (17,136)
8 $ 10,000 $ 6,768 $ (10,368)
9 $ 10,000 $ 6,446 $ (3,922)
10 $ 10,000 $ 6,139 $ 2,217
B1: Entering values:
You do not need to enter $ signs or commas. B1:B2 have been formated to turn the numbers into $
amounts.

B3: Entering values:

This is entered as .05, not 5. If you type in 5, you get back 500%. The cell is formatted to turn decimal
numbers into percents. Alternatively, you may type in 5% and it will not multipy by 100.
 1 3 5
2 4 6
3 5 7 Understanding cell referencing) The array to the left is set up to help you understand relative versus
4 6 8 absolute referencing. You can read about this using the help menus and by doing this simple exercise.
5 7 9 The equation in the upper left of each of the four rose blocks is equal to cell A1 using 4 different forms of
cell referencing. Absolute referencing means dragging doesn't change the reference; relative means it
Comparing 4 types does. Before dragging, think about what you would expect to happen in each case. Then do the
of cell referencing following: For each block, click on the upper left cell, then move the mouse's white + toward the bottom
1. Relative referencing right of2.the cell untilreferencing
Absolute the + changes to black; left click
3. Absolute to drag
row this cell across
referencing two columns
4. Absolute andreferencing
column see what
happens. Then drag the three cells down four rows and see what happens.
Cell A11=A1 Cell E11=$A$1 Cell I11=A$1 Cell M11=$A1
1 1 1 1

Accomplishing cell referencing: Now that you understand how the $ signs work to fix rows or columns, you can use them in
equations you create. You can do this in one of two ways:
1. Manually add the $ signs before either the letter or number or both depending on the form of referencing required; or
2. Once you enter the cell in an equation (either by typing it or by clicking on it) but before adding the next part of the equation
(like a +,-,*, or / sign) press the F4 key until you obtain the appropriate reference form (F4 cycles through the 4 options).
Name:

Instructions) Answer each question in the yellow space provided using the PV setup you created on your worksheet. The B column
is provided so you can enter values from your worksheet as needed to help you answer the question. To copy the value into the
new location on this worksheet, click on the value you want to copy off of your worksheet and then click copy. Click on the Q&A
worksheet tab and click on the cell in the B column associated with that question (B3, for example, is for question 1) then right click
and choose Paste Special, Values. (It is also useful to look over what else is available using Paste Special). Type your answer in
the appropriate cell in the C column. These cells have been formatted to wrap the text around if you have more than one line you
want to type.
Q1: Suppose you get what seems to be an incredible deal from truck dealer X; they will sell you a truck for $60,000. The problem
is, this brand only provides 8 years of service, not 10. Should you buy this truck? Explain.
A1:
Q2: Suppose another manufacturer, Y, offers you a truck that will last 15 years at a price of $100,000. Should you buy this truck?
Explain. (This extension is easy if you correctly set up your equations on your worksheet.)
A2:
Q3: Suppose you have to choose between X and Y's offer (from 1 and 2 above) or the original dealer Z (who sold a truck for
$75,000 that lasted 10 years). Which would you choose? Why?
A3:
Suppose the interest rate you face for discounting purposes is 6% rather than 5%. Reanswer 1, 2 and 3 in this instance.
Q1: Suppose you get what seems to be an incredible deal from truck dealer X; they will sell you a truck for $60,000. The problem
is, this brand only provides 8 years of service, not 10. Should you buy this truck? Explain.
A1:
Q2: Suppose another manufacturer, Y, offers you a truck that will last 15 years at a price of $100,000. Should you buy this truck?
Explain.
A2:
Q3: Suppose you have to choose between X and Y's offer (from 1 and 2 above) or the original dealer Z (who sold a truck for
$75,000 that lasted 10 years). Which would you choose? Why?
A3: