Getting Access to Spreadsheet Models for Managers

Spreadsheet Models for Managers

Present value and future value are just techniques for computing the value of an asset at one time given its value at another time. To do that computation, you need to know what the money equivalent of the asset's value could earn at interest during the interval.

Most formulas that you see for computing present value and future value assume that the prevailing interest rate during that interval is constant. Of course, that assumption is often unrealistic. But we make it with regularity, and you'll do well to remember that PV and fv formulas are only as good as the constant-interest-rate assumption.

In applying these concepts to non-monetary assets, there is a further complication — the action of the market for those assets. Market price movements can actually swamp the effects of interest-rate based calculations because the markets for some assets can be much more volatile than the markets for money. So if you're computing the future value of, say, a Rembrandt, it might be unwise to use projections of the prime rate in a straightforward application of the future value formula. You might want to use a more comprehensive estimate that takes into account behavior of the market for paintings by the masters.