42 Chapter 2 Time Value of Money

FV _ Future value. In this example, the FV is positive because we entered the PV as a negative number. If we had entered the 100 as a positive number, then the FV would have been negative. As noted in our example, you first enter the known values (N, I/YR, PMT, and PV) and then press the FV key to get the answer, 115.76. Here are some tips for setting up financial calculators. Refer to your calculator manual or to our calculator tutorial on the ThomsonNOW Web site for details on how to set up your specific calculator. One Payment per Period. Many calculators come out of the box assuming that 12 payments are made per year, i.e., they assume monthly payments. However, in this book we generally deal with problems where only 1 payment is made each year. Therefore, you should set your calculator at 1 payment per year and leave it there. End Mode.With most contracts, payments are made at the end of each period. However, some contracts call for payments at the beginning of each period. You can switch between End Mode and Begin Mode, depending on the problem you are solving. Since most of the problems in this book call for end-of-period payments, you should return your calculator to End Mode after you work a problem where payments are made at the beginning of periods. Number of Decimal Places to Display. Most calculators use all significant digits in all calculations, but display only the number of decimal places that you specify. When working with dollars, we generally specify two decimal places. When dealing with interest rates, we generally specify two places if the rate is expressed as a percentage, like 5.25%, but we specify four places if the rate is expressed as a decimal, like 0.0525. When students are first learning how to use financial calculators, two mistakes are common. First, students often forget that one cash flow must be negative. Mathematically, financial calculators solve a version of this equation:
(2-2)

Notice that for reasonable values of I, either PV or FV must be negative and the other must be positive to make the equation true. Intuitively, this is because in all realistic situations, one cash flow is an outflow (which should have a negative sign) and one is an inflow (which should have a positive sign). The bottom line is that one of your inputs for a cash flow must be negative and one must be positive. The second common mistake often occurs when inputting interest rates. For arithmetic operations with a nonfinancial calculator, the value 5.25% woul d be entered as 0.0525. But with a financial calculator, the value 5.25% should be entered as 5.25.
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Spreadsheets
Spreadsheet programs are ideally suited for solving many financial problems, including time value of money problems.3 With very little effort, the spreadsheet itself becomes a time line. Figure 2-1 shows how our problem would look in a spreadsheet. PV11 _ I2N _ FVN _ 0.
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textbooks Web site file FM12 Ch 02 Tool Kit.xls does the various calculations using Excel. We highly recommend that you go through the models. This will give you practice with Excel, which will help tremendously in later courses, in the job market, and in the workplace. Also, going through the models will enhance your understanding of financial concepts.