Re:
Anyone who needs to perform time value of money calculations
Definition
A financial calculator is an instrument used to perform time value of money calculations in the finance and business environment
The purpose of a calculator is to perform math calculations. If you press the “2” key, hit the “+” button, press the”2” key again and hit the “=” button, you will see the number 4 as the result. Of course we don’t need calculators for simple calculations like this. We need them for the more complicated ones that could take hours to do by hand, thus increasing the probability of error. A financial calculator has a specific purpose of calculating results you would normally see in the finance and business world. These are calculating payments, interest rates, present and future values, time periods, net present values, internal rate of return, and cash flows. It can also be used in statistics for things like linear equations, geometric means, and regression analysis. Basically it used for solving equations involving the time value of money.
There are five main functions on a financial calculator. They are: N = time, I = interest rate or rate of return, PMT = payment, FV = future value, and PV = present value. The others ones are CF = cash flows, IRR = internal rate of return, and NPV = net present value. Each function key can perform two different calculations. Click the up or down button to get the one you want. N, I, PMT, FV, PV, and CF have their own symbols on the function button. The calculator defaults to these. IRR and NPV do not. They are in small letters above a function key. You would click the upper button to perform these calculations. First you need to determine which function you are trying to calculate. Let’s say we are trying to find a payment (PMT). You must have values for the other four function keys to perform the calculation. PV, PMT, and FV can be zero.
Now, let’s look at a few examples of these function buttons. First, we’ll calculate the monthly payment on a mortgage. We are solving for PMT. N = 30 years. But we want a monthly amount so we’ll multiply by 12 for a total of 360. I = 5%. But since we are calculating a monthly amount, we need to divide by 12 for an amount of .4167. Let’s say the house we are buying costs $200,000 and we are putting nothing down. PV = 200,000. FV = 0. Click the PMT button, and you get $1,073.69. That is out monthly payment on a $200,000 mortgage.
The process is the same for each function key. Let’s say we want to know how much our portfolio will be worth in 20 years if we have $50,000 today and contribute $5,000 per year, earning 8%: N = 20, I = 8, PV = 50,000, PMT = -5,000. PMT is entered as a negative when we have a PV amount. Press the FV key and you get 461,857.68. If we want to find out how long it will takes us to be a millionaire if we started today with nothing and save $5,000 per year earning 8%: PV = 0, PMT = -5,000, I = 8, FV = 1,000,000. Press the N key and you get 36.81. If you’re just out of college at age 22, you’ll be a millionaire before your 60 years old. We can go through the same process to calculate PMT and PV.
As we can see, a financial calculator is a valuable tool in performing calculations we use every day
