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In cash flow diagrams, money invested is shown as negative and money withdrawn is shown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 -250.00 and a positive cash flow of 750.00
occurring at the same time on the cash flow diagram are entered as a 500.00 cash flow (750 - 250
= 500).
•
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 simple-interest contracts, interest is a percent of the original principal. The interest and
principal are due at the end of the contract. For example, say you loan 500 to a friend for a
year, and you want to be repaid with 10% simple interest. At the end of the year, your friend
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
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