For now, we need to focus on four of these. The keys labeled PV and FV are just what you would guess, present value and future value. The key labeled N refers to the number of periods, which is what we have been calling t. Finally, %i stands for the interest rate, which we have called r.1

If we have the financial calculator set up right (see our next section), then calculating a future value is very simple. Take a look back at our question involving the future value of $100 at 10 percent for five years. We have seen that the answer is $161.05. The exact keystrokes will differ depending on what type of calculator you use, but here is basically all you do:

1. Enter -100. Press the PV key. (The negative sign is explained below.)

2. Enter 10. Press the %i key. (Notice that we entered 10, not .10; see below.)

'The reason financial calculators use N and %i is that the most common use for these calculators is determining loan payments. In this context, N is the number of payments and %i is the interest rate on the loan. But, as we will see, there are many other uses of financial calculators that don't involve loan payments and interest rates.

Ross et al.: Fundamentals I III. Valuation of Future I 5. Introduction to I I © The McGraw-Hill of Corporate Finance, Sixth Cash Flows Valuation: The Time Value Companies, 2002

Edition, Alternate Edition of Money

136 PART THREE Valuation of Future Cash Flows

Now we have entered all of the relevant information. To solve for the future value, we need to ask the calculator what the FV is. Depending on your calculator, you either press the button labeled "CPT" (for compute) and then press FV , or else you just press FV . Either way, you should get 161.05. If you don't (and you probably won't if this is the first time you have used a financial calculator!), we will offer some help in our next section.

Before we explain the kinds of problems that you are likely to run into, we want to establish a standard format for showing you how to use a financial calculator. Using the example we just looked at, in the future, we will illustrate such problems like this:


0 0

Post a comment