Present Values 47

Spreadsheets also have a function that solves Equation 2-2. In Excel, this is the PV function, and it is written as _PV(I,N,0,FV).5 Cell E79 shows the inputs to this function. Cell E80 shows the function with fixed numbers as inputs, with the actual function and the resulting _$100 in Cell G80. Cell E81 shows the function with cell references as inputs, with the actual function and the resulting _$100 in Cell G81. The fundamental goal of financial management is to maximize the firms value, and the value of a business (or any asset, including stocks and bonds) is the present value of its expected future cash flows. Since present value lies at the heart of the valuation process, we will have much more to say about it in the remainder of this chapter and throughout the book.

Graphic View of the Discounting Process

Figure 2-4 shows that the present value of a sum to be received in the future decreases and approaches zero as the payment date is extended further and further into the future, and also that the present value falls faster the higher the interest rate. At relatively high rates, funds due in the future are worth very little today, and even at relatively low rates present values of sums due in the very distant future are quite small. For example, at a 20% discount rate, $1 million due in 100 years would be worth only about 1 cent today. (However, 1 cent would grow to almost $1 million in 100 years at 20%.) Summary: Present Value Calculations
Figure 2-3 What is discounting, and how is it related to compounding? How is the future value equation (2 -1) related to the present value equation (2-3)? How does the present value of a future payment change as the time to receipt is lengthened? As the interest rate increases? (continued)

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