Time Value of Money (TVM) is an extraordinarily important part of any project financing.
So how do you calculate the relationship between present value (PV), future value (FV), and periodic payments (PMT)? You can use either a handheld calculator or an Excel worksheet. Here are the TVM functions that are available on many calculators:
Present Value – PV
Payment – PMT
Number of compounding periods – N
Interest rate per compounding period – INT
Future Value – FV
In Excel, there are series of functions you can use:
PV =PV(rate, nper, pmt, [fv], [type])
PMT =PMT(rate, nper, pv, [fv], [type])
NPER =NPER(rate, pmt, pv, [fv], [type])
RATE =RATE(nper, pmt, pv, [fv], [type], [guess])
FV =FV(rate, nper, pmt, [pv], [type])
If you’re wondering how to populate any of these Excel functions with values, just click the fx button in the formula bar and that will give you the function’s syntax. You can also read more about any one of these in the “More help on this function” section within Excel.
You have to make sure whenever you’re doing these TVM calculations that you get the positive and negative values correct. For example, PMT, PV and FV can’t all be positive numbers!
Let’s assume you’re financing an energy project. The amount you’re financing is a positive number – the PV. If the loan is fully amortizing (i.e., the series of loan payments is set to retire the principal completely in addition to covering the interest during the loan term), the FV is zero. You’re paying the loan off with a series of cash outflows, so the PMT is negative.
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