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Here is an important tip: Appendix D in the back of the book contains some more detailed instructions for the most common types of financial calculators. See if yours is included, and, if it is, follow the instructions there if you need help. Of course, if all else fails, you can read the manual that came with the calculator.

How to Get the Wrong Answer Using a Financial Calculator There are a couple of common (and frustrating) problems that cause a lot of trouble with financial calculators. In this section, we provide some important dosand don'ts. If you just can't seem to get a problem to work out, you should refer back to this section.

There are two categories we examine, three things you need to do only once and three things you need to do every time you work a problem. The things you need to do just once deal with the following calculator settings:

1. Make sure your calculator is set to display a large number of decimal places. Most financial calculators only display two decimal places; this causes problems because we frequently work with numbers—like interest rates—that are very small.

2. Make sure your calculator is set to assume only one payment per period or per year. Most financial calculators assume monthly payments (12 per year) unless you say otherwise.

3. Make sure your calculator is in "end" mode. This is usually the default, but you can accidently change to "begin" mode.

If you don't know how to set these three things, see Appendix D or your calculator's operating manual. There are also three things you need to do every time you work a problem:

1. Before you start, completely clear out the calculator. This is very important. Failure to do this is the number one reason for wrong answers; you simply must get in the habit of clearing the calculator every time you start a problem. How you do this depends on the calculator (see Appendix D), but you must do more than just clear the display. For example, on a Texas Instruments BA II Plus you must press 2nd then CLR TVM for clear time value of money. There is a similar command on your calculator. Learn it!

Note that turning the calculator off and back on won't do it. Most financial calculators remember everything you enter, even after you turn them off. In other words, they remember all your mistakes unless you explicitly clear them out. Also, if you are in the middle of a problem and make a mistake, clear it out and start over. Better to be safe than sorry.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

III. Valuation of Future Cash Flows

5. Introduction to Valuation: The Time Value of Money

© The McGraw-Hill Companies, 2002

CHAPTER 5 Introduction to Valuation: The Time Value of Money

2. Put a negative sign on cash outflows. Most financial calculators require you to put a negative sign on cash outflows and a positive sign on cash inflows. As a practical matter, this usually just means that you should enter the present value amount with a negative sign (because normally the present value represents the amount you give up today in exchange for cash inflows later). By the same token, when you solve for a present value, you shouldn't be surprised to see a negative sign.

3. Enter the rate correctly. Financial calculators assume that rates are quoted in percent, so if the rate is .08 (or 8 percent), you should enter 8, not .08.

If you follow these guidelines (especially the one about clearing out the calculator), you should have no problem using a financial calculator to work almost all of the problems in this and the next few chapters. We'll provide some additional examples and guidance where appropriate.

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