FIN500 Mod03 P3a Time value of money calculations using the TI BAII Plus calculator - part 1

All right, I'm going to give a tutorial on the Texas Instruments BAII Plus calculator. This is the one that I would recommend purchasing for the corporate finance class and you can either purchase it at WalMart or office supply stores for around $30 or $35 dollars. First we'll turn on the calculator our partners, the on/off button is up here - the top right corner. Basically what we're going to do in here is first show you how to set up the calculator to display the number of decimals that you need and to change the number of periods. And then we're going to work on time value of money buttons. So first typically when the calculator comes set from the factory it shows two decimals but since we'll be working a lot with percentages, we need to show at least 4 decimals. So to change the number of decimals that are displayed we hit 2nd and then the format button which is the decimal point at the bottom, and you'll see it say a DEC equals. Change enter 4 and then hit the enter button on the very top row. And then you'll have 4 decimals displayed. Also, preset from the factory, it's set to 12 periods per year, so doing monthly payments. Let's change that to 1 period per year and we'll just adjust the number of periods in the interest rate instead. So to do so you hit 2nd and then the IY button - the number of periods per year - and then Enter. And then that will say set your periods per year to 1. Now the main - the 5 main time value of money buttons that we're going to be using are are here in gray. N is number of periods. IY is interest rate per year. PV is present value. PMT is payment. And FV is future value. So say for example we wanted to see how much a $100 dollar deposit would grow in 2 years at 5% interest. Okay, one thing to note on your calculator whenever you enter something in these five buttons it will stay there until you clear it out or override it. So this is begin with and it doesn't matter which buttons you put in first but we'll go from left to right. We'll say it's 2 years so you hit 2 N - and it will display N=2 5% interest here on the calculator you put interest rates in as whole numbers - not decimals. So hit 5 IY and then we said we're going to put $100 deposit so that $100 dollars is our present value - so $100 dollars PV. Now if we were making annual payments or additions to the account, we would have a payment button but since we don't we can leave that blank, but again, since the numbers that we put in the calculator are stored until we change it, I would recommend putting, always putting, something in the 4 buttons and then solve for the 5th. So we hit 0 payment and then to calculate the future value we hit CPT - so compute - right up here in the left-hand corner, future value. And you should get a value of a $110.25. Now note that that's negative. This calculator regards cash flows as inflows and outflows. Since we put in $100 dollars positive in its present value, you would take it out as future value. So you can just ignore the negative for the future value. When we get to later calculations I would recommend always putting the present value in as negative, especially when we're doing bond calculations - but we'll work on those later. All right, to clear that you can also clear all the buttons that you've entered by hitting 2nd in the future value button you see above that it says CLRTVM - so clear time value of money - and that erases everything that we've put in so far. But again if you just make sure to put in a number on all for the buttons that you have other than what you're solving, for you shouldn't have a problem there. All right now say if we're doing a how many years it takes to get $100 dollars to grow to $500 dollars at, say, 10% interest, all right, so we're going to be solving for N. Now note if you put in both a present and future value and put them both in as positive, you will get an error. So we need to make one of them negative. So again, our interest rate is 10%, so we hit 10 IY. We're going to say $100 so what we're going to start with and then hit this +/- minus button down here at the bottom to make that negative and then present value. Again, we don't have any payment so hit 0 payment. We want to have $500 dollars in the future sometime, so we'll hit future value. And then we hit compute N to see that it's going to take 16.886 years at 10% for $100 dollars to reach $500 dollars. Now this is also if you wanted to know, all right, how long - let's go the other way - if we wanted to see we want to leave our money in for 5 years, and how what kind of interest it would take for $100 dollars to grow into $500. Now, again, our $100 dollars we've already entered in the present value. $500 in the future value, so we can just leave those - we don't have to enter them again. But let's say, all right, we've got, a, I'll change that to 10 years, be a little more realistic, so you hit 10 and the number of periods, and then compute the interest rate, to see that account would have to turn 17.46% annual interest for $100 dollars to grow to $500 dollars in 10 years. But again, whatever you're putting into of these 3 buttons (present value, payment, or future value) you have to make one of them negative and I would recommend always making present value negative. Now your textbook also talks about ordinary annuities versus annuities due. Ordinary annuities is where the cash flow occurs at the end of the period. Annuity due is where the cash flow occurs at the beginning of the period. So we need to adjust the calculator to take the, to recognize that. So, say if we're going to put $100 dollars in a year - for 5 years and in an account that earns 8% interest, and we'll calculate the future value. So hit 5 N and then 8% was our interest rate so 8 IY, now we don't have a present value, so we're going to hit 0 present value. And we're going to put a $100 dollars in a year so 100 is our payment. And then we want to know how much that will be at the end of the period. So we hit compute future value and you can see it'll grow to $586.66. All right, now that was an ordinary annuity because we didn't change anything in our calculator, our calculator is set to where the payments occur at the end of the period. Okay, that's our default. If we want to change that to make that annuity due we hit 2nd payment - so 2nd in the payment button - all right, you see it displays end. Then we hit 2nd enter - or set - and you'll change, see the calculator change to BGN or begin. And also at the very top it will display BGN. So you need the calculator set to BGN to calculate annuities due. Now all of our numbers are still in there so we can hit compute future value and you see with an annuity due it grosses $633. So annuities due, future value of annuities due are always going to be higher than future value of an ordinary annuity as we can see in this example. Now normally most calculations we'll do will have end of the year cash flows. So we need to change that back. To change it back, again we hit 2nd payment 2nd enter and it changes back to end.