3 Time Value of Money

The examples in the following sections are calculated with the Mode menu preferences in their default settings, unless otherwise noted. For more information about basic features and setting preferences, see Chapter 1, Basic Features.

Time Value of Money (TVM) Keys

Cash flow diagrams are useful tools for analyzing financial situations, as they help you identify the TVM functions needed to resolve your problem. A cash flow diagram is a drawing with a set of vertical arrows arranged on a horizontal line. The horizontal line represents the period of time from the beginning of the financing to the end. The vertical arrows represent the money or cash flows at certain times throughout the period. The arrows' length is proportional to the cash flow amount each arrow represents; a longer arrow indicates a larger amount, a shorter arrow, a smaller amount. Each arrow's position on the line represents the time at which the cash flow occurs. The orientation of the arrow, up or down, represents the "direction" of the cash flow: up for money received, down for money paid out. See Figure 1.

(PV) Loan amount-

(Beg) (End) For payments occurring at the

money received is

beginning or end of the compounding period

positive

 

 

 

 

 

 

 

 

Q(P/YR) Payments per year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PMT

PMT

PMT

PMT

PMT

PMT

1

2

3

4

5

6

(PMT) Amount paid out in

(N) Number of payments

(FV) Final loan

equal payments at regular

or compounding periods

value (if any)

intervals

 

 

Figure 1 Cash Flow Diagram Example with Corresponding TVM Keys

The TVM functions of the calculator can solve problems with at least one cash flow, and problems in which all the cash flows, except the first and last, are of the same value. To solve other types of cash flows, refer to Chapter 4, Canadian Mortgages: TVM Canada, or Chapter 5, Cash Flows.

Time Value of Money 27