Essential Time Value of Money Calculations

Question 1

What are the three essential steps to solving Time Value of Money problems?

Answer 1

1. Draw a timeline
   
   1. always draw a timeline and populate
      
      1. PV on left
      2. FV on right
      3. Interest above
      4. Payments below
2. List the TVM Variables
   
   1. write down in order they appear on calculator
   2. Use a question mark to represent the value being solved for, then populate the known values in your calculator
   3. Enter a zero for unknown variables, never leave blank
3. Enter the Keystrokes Into Your Calculator

Question 2

What do + and - signs indicate?

Answer 2

• the direction of cash flow
• Consider if CF is being received or paid
  
  • received = +
  • paying/investing = -

Question 3

What are the keystrokes for recalling cash flows?

Answer 3

• [RCL][CF_j][+][-] to scroll through the cash flows

Question 4

What are the keystrokes for changing the 3rd cash flow to $300?

Answer 4

• (C)
• [RCL][CF_j]
• 3 [CF_j] 3 (display will show original entry)
• 300 [INPUT}

Question 5

How do you enter multiple even cash flows?

Answer 5

• Enter the dollar amount of the cash flow
• CF_j
• Enter the number of consecutive period amounts
• [SHIFT}
• N_j (CF_j)

Question 6

What is the formula to adjust for inflation?

Answer 6

[(1+R_n) / (1 + i) - 1] x 100

R_n = Nominal ROR/Investment Return

i = Inflation Rate (Tuition or Retirement Inflation)

Question 7

What are the keystrokes for determing interest and principal paid on a mortgage over a period of time? Use 1st 8 months and following year as an example.

Answer 7

• Calculate the mortgage pmt by entering PV, Interest, N
• For 8 months
  
  • 1 [INPUT] 8
  • [OS] {AMORT] (dislplay should read (1-8)
  • = (displays principal)
  • = (displays interest)

Question 8

What are the steps for solving retirement and education needs questions in the quickest manner?

Answer 8

1. Determine NPV of cash flows at the time period zero
2. Determine the savings required to meet the goal.
   
   1. check begin/end mode in question!!!

Question 9

What are the steps to solve an education funding problem where the child is born today and will go to college for four yearsat age 18?

Given: Tuition (today’s dollars), ROR, Inflation

Answer 9

• Example on page 75 of calculator book
• Step 1
  
  • Enter CF₀ = 0
    
    • Enter 18 [OS] N_j
  • Enter CF₀ = (annual tuition amount)
    
    • Enter 4 [OS] N_j
  • Calculate the inflation adjusted return
    
    • Enter as I/YR
  • [OS] NPV to determine total amount to save
• Step 2
  
  • N = 18
  • I = ROR
  • PV = NPV from Step 1 (not FV!!!)
  • FV = 0
  • Solve for PMT