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Time Value of Money Solution Grid

 Self-Paced Overview

Using the Solution Grid

Problem:

How much will you have in 6 years if you deposit $400 today at 3% interest compounded annually?

Steps

  1. Read the problem thoroughly.  Don't rush. This problem is pretty simple, but other problems may have more information that will have a bearing on the solution. Sometimes one word will change the solution.
  2. Make sure you know what you're being asked to do.  In this problem you're being asked to find a future amount by making a cash outflow today.
  3. Prepare a solution grid.  With a pencil and some paper, make note of the inputs you will be entering into your calculator. Literally jot down the TVM components as column headings and fill out the known data inputs that you derive from the problem. This can keep you from making mistakes. It also gets you in the habit of inputting information into your calculator in the same order every time. That way you may not make as many errors and may not skip over as many steps as you might otherwise. In this case, the solution grid is:

    P/YR
    1
    N I/YR PV PMT FV
    6 3 400 +/- 0 ?

    There are several items you should note:

    • First, note that P/YR is isolated from the other TVM components in the solution grid. This is to remind you to always set Periods per Year (P/YR) on your calculator before inputting any other TVM components. In this problem you are told interest is compounded annually. Therefore, set 1 P/YR.
    • Note that you do not enter a percent sign for the interest rate (I/YR).
    • Notice that your initial deposit is a cash outflow, so you will represent that by entering 400 into the calculator, then pressing +/. This changes the sign of the $400 and means that your future amount will be a cash inflow. You should always enter cash outflows as a negative value.
    • There was no annuity in this problem. However, a 0 will be entered in the PMT field to ensure that nothing will be carried forward from a previous problem, just in case you forget to clear the calculator. This is just a good habit to form.
    • You are solving for the future amount. Put a ? in the FV field of your solution grid. Then when you enter your data into the calculator, you will enter all the other data in the order shown in the grid. In this problem you will press FV last, and the answer should appear.
  4. Clear the calculator.  You should do this every time you work a new problem, by pressing   C ALL.
  5. Now that you have completed your solutions grid, enter all information in your calculator in the order laid out in the grid.

    The answer is:  $477.62

    The calculator keystrokes will be:

    C
      C ALL
    1    P/YR
    6  N
    3  I/YR
    4  0  0  +/  PV
    0  PMT
    FV
    CE/C
    2nd CLR TVM
    2nd P/Y  1  ENTER  2nd QUIT
    6  N
    3  I/Y
    4  0  0  +/  PV
    0  PMT
    CPT  FV

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