Question

When calculating the FV of a savings account that has a lump sum deposited in year 0 and additional payments made over a period of out years, would it be correct to calculate the year 0 as a negative PV value and the out year payments as a negative PMT value, using the FV excel function? (stuck on whether or not the values should be positive or negative. Since it is a payment, I assume negative?)

Answer 1

It is correct to consider the initial lump sum payment as negative as well as the periodic payments as negative value.

As an example if we make a lump sum payment of $ 10,000 into a savings account that has a 10% rate of return per year. Also if we make annual payment of $ 1000 into the same savings account for a period of 10 years, the future value of the account using FV excel function is found as follows

In excel, choose formulas , financial , FV function.

Home Insert Page Layout Formulas Data Review View fx * 5 ? A la O ... Define Name - Power Pivot Tell me what you want to do... Trace Precede FX Use in Formula Trace Depende Name Manager Create from Selection Remove Arrow Defined Names Insert Function AutoSum Recently Financial Logical Text Date & Lookup & Math & - Used - Time Reference Trig Function Library More Functions - X Fox =FV() в с А =FV() Function Arguments = number = number Rate Nper Pmt PV Type = number = number = number 6 Returns the future value of an investment based on periodic, constant payments and a constant interest rate. Rate is the interest rate per period. For example, use 6%/4 for quarterly payments at 6% APR. Formula result = Help on this function OK Cancel

Home Insert Page Layout Formulas Data Review View fx 2 A É D O E Power Pivot Tell me what you want to do... e Define Name - Trace Precede Ft Use in Formula Trace Depend Name Manager Create from Selection Remove Arrow Defined Names Insert Function AutoSum Recently Financial Logical Text Date & Lookup & Math & - Used Time Reference Trig Function Library More Functions A1 - X Forc =FV(10%,10,-1000,-10000) C A B =FV(10%, 10,-1000,-10000) Function Arguments FV * * Rate 10% Nper 10 Pmt -1000 PV -10000 Type = 0.1 = 10 = -1000 = -10000 = number * = 41874.8492 Returns the future value of an investment based on periodic, constant payments and a constant interest rate. Pv is the present value, or the lump-sum amount that a series of future payments is worth now. If omitted, P = 0. Formula result = $41,874.85 Help on this function O OK Cancel

The future value is calculated as $ 41,874.85

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The above result can be verified by hand calculation by using the future value of investment equation and future value of annuity equation.

FV = $10,000 (1 + 0.10) 10 + $ 1000 [(1 + 0.10) 10 - 1] 0.10

FV = $ 25,937.4246 + $ 15,937.4246

FV = $ 41,874.85

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The results obtained by hand calculation and using excel are same.