Chapter 4.3® - How to Use a Financial Calculator BAII Plus to Perform Time Value of Money & Present / Future Value Calculations

• Part 4.1 - Time Value of Money, Future Values of Compounding Interest, Investing for more than 1 Period & Examination of Original Investment & Growth of Investment
• Part 4.2 - Compounding Interest Homework Problem & Time Value of Money Continued - Future Value Formula, Growth of $100 & Future Value Comparisons
• Part 4.3 - How to Use a Financial Calculator BAII Plus to Perform Time Value of Money & Present / Future Value Calculations
• Part 4.4 - Changing Advanced Function Keys (BGN, C/Y, P/Y), Converting from Nominal Interest to Effective Interest Rates using BAII Financial Calculator
• Part 4.5 - Examples of Interest Rate Calculations & Practice Questions #1 - #7
• Part 4.6 - Nominal to Effective Interest Rate Calculations & Practice Questions #8 - #16
• Part 4.7 - Present Value & Discounting – We Know the Future Value, how do we find the Present Value? Single Period Case & PV Discounting for Multiple Periods
• Part 4.8 - An Example of Present Value Discounting & Saving Up Money & Deriving the Basic Present Value Equation
• Part 4.9 - Determining the Discount Rate using Basic Present Value equation & Finding the Number of Accounting Periods
• Part 4.10 - Summary of Time Value Formulas & Calculations
• Part 4.11 - Discounted Cash Flow Valuations - Future Value of Multiple Cash Flows & Designing the Cash Flows Timeline
• Part 4.12 - Compound the Accumulated Balance Forward One Year at a Time - Discounted Cash Flow Valuation - Determining Present Value of Multiple Future Cash Flows & Designing a Financial Timeline
• Part 4.13 - Determining Present Value of Multiple Future Cash Flows – Homework Example
• Part 4.14 - Calculating Present Value with Multiple Future Cash Flows – Example #2
• Part 4.15 - Valuing Annuity Level Cash Flows – Present & Future Value of Annuities
• Part 4.16 - Calculating Annuity Payments using Annuity Present Value Factor – Example
• Part 4.17 - Accounting for Perpetuities & Using the Annuity Present Value Factor Formula
• Part 4.18 - Accounting for Growing Perpetuities & Simplified Formula for Present Value of Growing Perpetuity - Example of Growing Perpetuity on Rental Cash Flows

The future value calculations we did above can be very tedious when say the investment is set to grow not over 3-5 years, but over 30-35 years. Is there an easier way to perform these calculations? Yes there is! Your financial calculator can help make these calculations a breeze, but learning a financial calculator is very tricky at first, but very much fun after you learn it! In this section, we will show you how to perform present value/ future value calculations on your financial calculator. We will be using BA II Plus Texas Instruments Financial calculator (Model# S-1205D).

Financial calculators have the competitive advantage of handling lots of computations but that is pretty much all they can do. In other words, you as the financial/business analyst must understand the problem at hand and be able to program the financial calculator to achieve your desired answer.

Practice Problem

Let’s solve a time value of money question by using our financial calculator. Referring to our original example of $100 invested at 10% annual interest rate, what will we have in 5 years, assuming the interest rate does not change?
Original Problem: Consider you invest $100 in a savings account that pays 10% interest per year, how much will you have at the end of the 5 years?

To make it easier to understand the calculations, make a table like below:

Guidelines for Using a BA II Plus Financial Calculator

i) Before you perform any new calculation, clear out the calculator as this is very important. If you do not clear your calculator, you will get an answer based on information input earlier, which will most likely provide you with false answers. In order to clear the previous values in the calculator, press the 2nd key, then CLR TVM. CLR TVM stands for Clear Time Value of Money. Also note that turning off the calculator and turning it back on won’t work, you must clear the previous histories. Also if you are in the middle of a calculation and make a mistake, clear it out and start over. It’s better to be safe and correct, than doubtful of your calculations and ultimately sorry for the wrong answer!

ii) Put a negative sign on cash outflows. Be sure to put a negative sign on cash outflows (outgoing payments), and a positive sign on cash inflows (incoming payments). This also means you should enter the present value amounts with a negative sign because the present value represents the amount you are giving up today in exchange for cash inflows later. No wonder in our example above, we set the present value at $-100 at 10% interest for 5 years, to arrive at a positive $161.05 future value answer.

iii) Enter interest rates correctly. Financial calculators assume that interest rates are quoted in percent, thus if the rate is 0.10 or 10%, you would input this simply as “10” in the calculator.