Ever hear of the saying, "a dollar today is worth more than a dollar tomorrow?"

Well, let's learn how spreadsheet models can help show why this is true, and much, much more.

Click the **Next** link below to continue.

Next

Cash is king, so let's start with it. **Cash flow** is a series of payments received over time.

Cash flows received today or "Year 0" are shown in cell **B5**, a year from now or "Year 1" in cell **B6**, and so on (cells **B7:B10**).

Enter a yearly payment of **$100** in cell **B1** and click the **[Submit]** button below.

Notice that the **Cash Flow** values for **Year 0** to **Year 5** or **B5:B10** have been automatically updated. Each cell in **B5:B10** references the yearly payment in cell **B1**.

Click the **[Formula]** button below to see how this was done.

Whoa, things just got weird!

Notice that each cell in **B5:B10** points to cell **B1** using the cell reference **[=$B$1]**. This is an example of an "Absolute Reference", denoted by the "$" in front of the column and row address of cell **B1**. Basically, the "$" is a way to "fix" the cell to point to a specific column or row location in a spreadsheet.

Absolute row and column references always point to the same location when copied anywhere else in a spreadsheet.

Click the **[Formula]** button below to switch back to the standard view and continue.

Good, now we're back basics. Next, let's look at **Present Value**.

Present value measures how much future payments are worth today. Let's say I promise to pay you $100 today and then $100 every year afterwards for 5 years, guaranteed.

Not bad, but suppose a bank would pay you 10% interest on that same $100 at the end of each year. By waiting for me to pay you at the end of each year instead, you are giving up the chance to earn 10% interest! We would then say that these cash flows have an "opportunity cost" of 10%.

To make up for this, we would "discount" the yearly $100 payments by 10%. We call this the **Discount Rate**.

Enter a Discount Rate of **10%** into cell **B2** and click the **[Submit]** button below.

Looks like it's time for a discount double check!

The present value of payments received today ("Year 0") are still worth $100 (cell **C5**). However, the present value of the future payments in **C6:C10** have been reduced to reflect the 10% discount rate in cell **B2**.

Also, the combined present value of each cash flow or **Net Present Value** in cell **C11** has been reduced from $600 to $479.

Click the **[Formula]** button below to see how this was done.

Present Value is determined

by the formula:

**[CFn]/(1 + DR)^n** where:

- **CFn** is the **Cash Flow** at period **n**

- **DR** is the **Discount Rate**

Here, **n** is represented by the given Year. Net Present Value is calculated using the **SUM()** function, which returns total sum of the Present Values in cells **C5:C10**.

Click the **[Formula]** button below to switch back to the standard view to continue.

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