The arrow pointing up at the right of the diagram indicates that money is received
at the end of the transaction. Every completed cash flow diagram must include at
least one cash flow in each direction. Note that cash flows corresponding to the
accrual of interest are not represented by arrows in the cash flow diagram.
The quantities in the problem that correspond to the first five keys on the top row of
the keyboard are now readily apparent from the cash flow diagram.
n is the number of compounding periods. This quantity can be expressed in
years, months, days, or any other time unit, as long as the interest rate is
expressed in terms of the same basic compounding period. In the problem
illustrated in the cash flow diagram above, n = 2 × 12.
The form in which n is entered determines whether or not the calculator
performs financial calculations in Odd-Period mode (as described on pages
63 through 67). If n is a noninteger (that is, there is at least one nonzero
digit to the right of the decimal point), calculations of i, PV, PMT, and FV are
performed in Odd-Period mode.
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.
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.
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 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.)
Section 3: Basic Financial Functions
45
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