38 Section 3: Basic Financial Functions
z i is the interest rate per compounding period. The interest rate shown in the
cash flow diagram and entered into the calculator is determined by
dividing the annual interest rate by the number of compounding periods. In
the problem illustrated above, i = 6% ÷ 12.
z PV – the present value – is the initial cash flow or the present value of a
series of future cash flows. In the problem illustrated above, PV is the
$1,000 initial deposit.
z PMT is the period payment. In the problem illustrated above PMT is the
$50 deposited each month. When all payments are equal, they are referred
to as annuities. (Problems involving equal payments are described in this
section under Compound Interest Calculations; problems involving
unequal payments can be handled as described in Section 4 under
Discounted Cash Flow Analysis: NPV and IRR. Procedures for calculating
the balance in a savings account after a series of irregular and/or unequal
deposits are included in the HP 12C Platinum Solutions Handbook.)
z FV – the future value – is the final cash flow or the compounded value of a
series of prior cash flows. In the particular problem illustrated above, FV is
unknown (but can be calculated).
Solving the problem is now basically a matter of keying in the quantities
identified in the cash flow diagram using the corresponding keys, and then
calculating the unknown quantity by pressing the corresponding key. In the
particular problem illustrated in the cash flow diagram above, FV is the unknown
quantity; but in other problems, as we shall see later, n, i, PV, or PMT could be
the unknown quantity. Likewise, in the particular problem illustrated above there
are four known quantities that must be entered into the calculator before solving
for the unknown quantity; but in other problems only three quantities may be
known – which must always include n or i.
The Cash Flow Sign Convention
When entering the PV, PMT, and FV cash flows, the quantities must be keyed
into the calculator with the proper sign, + (plus) or – (minus), in accordance with
…
The Cash Flow Sign Convention: Money received (arrow pointing up) is
entered or displayed as a positive value (+). Money paid out (arrow
pointing down) is entered or displayed as a negative value (–).
The Payment Mode
One more bit of information must be specified before you can solve a problem
involving periodic payments. Such payments can be made either at the beginning
of a compounding period (payments in advance, or annuities due) or at the end of
the period (payments in arrears, or ordinary annuities). Calculations involving
