The Use of Financial Calculators and Spreadsheets - Financial Management

The concepts in this chapter are illustrated using four methods: Time value of money problems may be solved using mathematical formulas, special interest factor tables provided at the end of the textbook, financial calculators, and spreadsheet software. The serious business student should plan on becoming adept at the use of financial calculators and spreadsheet software, such as Microsoft Excel, to solve time value of money problems efficiently. Spreadsheet software also has many applications across all business disciplines. In addition to applications in this chapter, spreadsheets are useful in solving security valuation, capital budgeting, and financial forecasting problems.Most employers consider it an asset if a potential employee is already familiar with the use of spreadsheets.

While the use of financial calculators and spreadsheets is encouraged, we urge students to familiarize themselves as well with the formulas and the use of the tables in solving the basic time value of money problems. Solving problems initially by using formulas and the tables provides a better appreciation of what is happening on a conceptual level.We have found that going straight to the calculators or to spreadsheets often results in students thinking in mechanical terms—inputting numbers into a calculator or a spreadsheet with little appreciation for what it is you are really trying to do in the problem.

Calculator Solution

The calculator solutions are illustrated in the margins throughout the chapter. The same basic steps are involved regardless of which financial calculator you use. There are five basic keys that are utilized for solving time value of money problems. You can think of each key as a specific variable.While the location and specific notation may vary between calculators, usually the five keys are grouped together. An example of a margin calculator solution is shown in the margin on this page.

The five basic keys are

n i PV PMT FV

n = Number of periods
i = Interest rate per period
PV = Present value amount
PMT = Payment
FV = Future value amount

As a general guideline, you should do the following before using a financial calculator to solve a time value of money problem:

  1. Set number of payments per year to 1.
  2. Clear the time value of money registers so that values held over from a previous problem do not affect your current calculations.
  3. Set payments to end-of-period mode.
  4. Some calculators are preset to display only two decimal places; while this may be sufficient in most instances, we suggest removing this feature, to use floating-decimal.

Spreadsheet Solution

Spreadsheet solutions are presented for selected problems in special boxes throughout the chapter. Although a variety of spreadsheets exist, we will be illustrating problems in this chapter using Microsoft Excel. Spreadsheets are simply a series of the rows and columns making up a matrix of cells. The rows are identified by numbers while the columns are referenced by alphabetical characters. A sample spreadsheet is shown here:

Spreadsheet Solution

Individual cells are identified by the row and column in which they are located, for example, the highlighted cell in the sample spreadsheet above is B4—column B, row 4. The cells may contain text material, numbers, or formulas. In solving time value of money problems, we will be using several time value of money functions built into the spreadsheet software. Functions are formulas built into the spreadsheet, sparing us the need to actually enter the formulas. The functions we will be using are

PV—to calculate present value
FV—to calculate future value
PMT—to calculate payments
NPER—to calculate the number of periods
RATE—to calculate the interest rate or discount rate

These functions are used to calculate the corresponding variable given other known values for the problem.


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Financial Management Topics