Introduction to Financial Calculators

Calculating present values by hand can be laborious. Therefore, financial managers generally turn to
financial calculators or computer spreadsheets to remove much of the tedium. We explain here
how to use financial calculators to solve simple time-value-of-money problems.

Most financial calculators use five keys that correspond to the inputs for common problems
involving the time value of money:

n i PV PMT FV

Each key represents the following input:

n is the number of periods. (We have been using t to denote the length of time or the number of
periods.)
i is the interest rate, expressed as a percentage (not a decimal). For example, if the interest rate is
8%, you would enter 8, not .08. On some calculators, this key appears as I/YR, I/Y, or just i. (We have
been using r to denote the interest rate.)
PV is the present value.
FV is the future value.
PMT is the amount of any recurring payment, that is, any intermediate payments that come before
the date when future value, FV, is calculated. We will start with examples where there are no
recurring payments, so for now we just set this key to zero.

Future Values
Given any four of these inputs, the calculator will solve for the fifth. For example, suppose that you
have invested $20,000 at an interest rate of 4%. You want to know how much your investment will
amount to at the end of 5 years. Your inputs would be as follows:
n i PV PMT FV
Inputs 5 4 -20000 0

For example, to enter the number of periods, type 5 and then press the n key. Similarly, enter an
interest rate of 4 and a present value of -20000 (first press 2000, then press the + / key to change
the value to negative, and finally press PV to enter the value into the PV register). There are no
recurring cash flows, so you need to enter a value of 0 for PMT. You now wish to solve for the future
value given the other four inputs. On some calculators, you do this by pressing FV. On others, you
need to press first the compute key, which may be labeled CPT or COMP, and then press FV. Your
calculator should show a value of $24,333.06.

Why did we enter a minus sign before 20000? Most calculators treat cash flows as either inflows
(shown as positive numbers) or outflows (negative numbers). For example, if you invest $100 today
at an interest rate of 4%, you pay out money now (a negative cash flow), but you will receive $104 in
a year, a positive cash flow at that time. Therefore, you enter the initial outflow as a negative
number and the calculator displays FV as positive number. The following time line of cash flows
shows the reasoning employed. The final positive cash flow of $104 has the same present value as
the $100 invested today.
FV = $104
Year: 0 1

PV = $100

If, instead of investing, you were to borrow $100 today, you would enter PV as a positive number.
In this case, FV would appear as a negative number, showing that you will need to pay out money
when your loan matures.

Present Values
Consider the following savings problem. You need to know the amount that you must put aside
today to produce $3,000 in 2 years. In this case your inputs to a financial calculator look like this:

n i PV PMT FV
Inputs 2 4 0 3000

Now compute PV; you should get an answer of - 2572.02. Again the answer is displayed as a
negative number because you must make a cash outflow today (an investment) of $2,572.02 in
order to reap the cash inflow of $3,000 in 2 years.

Annuities
Now we get to use the PMT key. In Chapter 2 we looked at the instalment plan offered by Tiburon
Autos. It called for the buyer to pay $5,000 at the end of each of the next five years. If the interest
rate is 7%, what is the car really costing?

To find the answer on your financial calculator, you must enter the following numbers:

n i PV PMT FV
Inputs 5 7 -5000 0

Note that PMT is equal to the regular annual payment ($5,000). Also it is entered as a negative
number, since you are paying out $5,000 a year to Tiburon. There are no further payments involved,
so FV is set at zero. (If, say, you were also required to pay an additional $3,000 in year 5, you would
need to enter a future value, FV, of -3,000.) Now compute PV; you should get an answer of
20,500.99.

You can also use a financial calculator to solve the mortgage payment problem in Example 2.5. A
savings bank needs to set the payments on a mortgage so that they would have a present value, PV,
of $250,000. There were 30 annual payments and the interest rate was 12% a year. To find the
regular annual payment (PMT), you enter the following numbers:

n i PV PMT FV
Inputs 30 12 100,000 0

Notice that you enter PV as a positive number; you get an inflow of cash when the bank lends you
the money. When you press the PMT key, you should get the answer-31,036 for the regular cash
outflow.

Suppose that the mortgage is an annuity due with the first annual payment made immediately. You
can solve for annuities due by pressing the begin key on your calculator. The calculator will
automatically interpret the cash-flow series as an annuity due with the cash flows occurring at the
start of each period. To return to the ordinary annuity mode, just press the begin key again.