Once you understand TVM conceptually, this page is designed to make it easy for you to compute it using your financial calculator. The directions are not specific to any calculator. You should consult your calculator’s instruction book to see the procedures for the Present Value of a Future Sum, Future Value, Present Value of an Annuity Due,(PVAD) Present Value of an Ordinary Annuity (PVOA), etc.
To solve any Time Value of Money problem with even payments, you need to know all but one of the following variables. If you get in the habit of writing down the five variables’ abbreviations in a column before you read the problem, you can fill them in as you go, and will be able to solve the problem easily.
PV (Present Value) =
FV (Future Value) =
PMT (Payment) =
N (Number of periods) =
I (interest rate) =
In addition, you will need to know whether the payment is at the Beginning or the End of the period, and how many times per year payments are made.
When computing simple Present Values of a Future Sum, or Future Value of a Single Sum, the payment variable is always zero, and Begin or End is irrelevant. HOWEVER, we recommend that you always enter the 0 payment in your calculator. That way, if a previous calculation that had a payment is still in the calculator, the payment amount will be corrected. You may think that you would never forget to clear your calculator, but everyone sometimes makes mistakes.
So, write down the 5 variables, write B/E, and Numof payments per period.
Then, as you read the problem, fill in the numerical values. If there are a number of periods per year, on some calculators you must multiply the number of years by the payments per year to get N, and divide the annual interest rate by the number of payments per year to get I. On other calculators, you simply put in the number of periods per year, and it does the calculation for you. Know which kind of calculator yours is. We will practice this in class so that you internalize the methodology and become facile at it.
You should also go onto your computer and open Excel. Set up a spread sheet with the same five variables and your begin/end question listed, then click on Fx to use a function.
Choose Financial, then PV. This will compute the Present Value for you just as you could with a regular calculator or with your financial calculator.
If you are good with Excel, you can set yourself up with a general worksheet that will solve your TVM homework for you. See if you can do it!
Click here for more about Time Value of Money