Signs of Cash Flows
In cash flow diagrams, money invested is shown as negative and money withdrawn is shown as positive. Cash flowing out is negative, cash flowing in is positive.
For example, from the lender’s perspective, cash flows to customers for loans are represented as negative. Likewise, when a lender receives money from customers, cash flows are represented as positive. In contrast, from the borrower’s perspective, cash borrowed is positive while cash paid back is negative.
Periods and Cash Flows
In addition to the sign convention (cash flowing out is negative, cash flowing in is positive) on cash flow diagrams, there are several more considerations:
•The time line is divided into equal time intervals. The most common period is a month, but days, quarters, and annual periods are also common. The period is normally defined in a contract and must be known before you can begin calculating.
•To solve a financial problem with the HP 10bII+, all cash flows must occur at either the beginning or end of a period.
•If more than one cash flow occurs at the same place on the cash flow diagram, they are added together or netted. For example, a negative cash flow of
•A valid financial transaction must have at least one positive and one negative cash flow.
Simple and Compound Interest
Financial calculations are based on the fact that money earns interest over time. There are two types of interest:
•Simple interest
•Compound interest
The basis for Time Value of Money and cash flow calculations is compound interest.
Simple Interest
In
owes you 550.00 (50 is 10% of 500). Simple interest calculations are done using the §
key on your HP 10bII+. An example of a simple interest calculation can be found in chapter 6 under the section titled, Interest Rate Conversions.
56 Picturing Financial Problems