What does the PV function calculate?

What does the PV function calculate?

• A. Net present value of uneven cash flows.
• B. Present value of a cash flow for a fixed length of time.
• C. Future value of a cash flow.
• D. Internal rate of return.

Answer: (B)

The PV function calculates the present value—the value today of a stream of future cash flows discounted at a constant rate over a fixed number of periods. It handles regular payments (an annuity) via the rate, nper, and pmt arguments, and can also account for a specified future value (fv) or whether payments occur at the beginning or end of periods (type). This is why the option describing the present value of a cash flow for a fixed length of time is the best fit: it directly captures the idea of translating future amounts into their today’s worth over a defined horizon. It isn’t the net present value of uneven cash flows (that’s a different concept a separate function handles), it isn’t the future value (that computes what today’s money will grow to in the future), and it isn’t the internal rate of return (that finds the discount rate that makes NPV zero).

The PV function calculates the present value—the value today of a stream of future cash flows discounted at a constant rate over a fixed number of periods. It handles regular payments (an annuity) via the rate, nper, and pmt arguments, and can also account for a specified future value (fv) or whether payments occur at the beginning or end of periods (type).

This is why the option describing the present value of a cash flow for a fixed length of time is the best fit: it directly captures the idea of translating future amounts into their today’s worth over a defined horizon.

It isn’t the net present value of uneven cash flows (that’s a different concept a separate function handles), it isn’t the future value (that computes what today’s money will grow to in the future), and it isn’t the internal rate of return (that finds the discount rate that makes NPV zero).