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This is a short tutorial on how to do basic time-value calculations on a TI BA II Plus calculator. It covers Lump Sum, NPV, IRR, and Uneven Cash Flows. Great for students in finance classes.

Okay well i’m going to use a texas instrument ba2 plus calculator and show you how to do a few simple present value problems from the very simple lump sum uh you know present value of a lump sum all the way to a series of uneven cash flows all right so first thing you do obviously turn it on upper right when you first buy one of these it usually has two decimal

Places only if you want more than two decimal places you can hit this second function right there and then down here you hit format where the dot is and then you could pick something like eight hit enter and now you’ve got eight decimal places okay so let’s say that you’ve got a problem where you want to just calculate the present value of a lump sum so what’s

The present value of a future cash payment of 25 000 and you’re gonna receive this twenty five thousand dollars in four years and your discount rate is five percent so what do you what are you willing to pay for that today what’s the present value of that so these white buttons are all your present value functions so you can hit these in any order let’s go ahead

And start with the future value we know the future value is 25 000. punch that in future value all right we know we’re going to receive it in four years so we’re going to go 4 n all right and the discount rate is 5 so you punch punch in 5 you don’t punch in 5 you leave it as an integer so 5 iy now there are no um periodic payments it’s just a lump sum so let’s

Go ahead and put zero payment in there and then we just go compute present value 20 and it says minus twenty thousand five six seven the reason it says minus 20 is because you’re going to pay it’s an outflow of 20 000 and then there’s going to be an inflow of 25 000. so it usually has a different sign or it does have a different sign but the present value is

Then 20 000 positive 20 567 dollars and 56 cents okay now let’s do another one let’s let’s do let’s say you want to calculate the interest rate instead so what is the market rate which which equates an inflow a future value of a hundred thousand you’re going to receive a hundred thousand dollars in three years and to receive that hundred thousand you have to pay

Ninety thousand dollars today so let’s start with the present value for ninety thousand in here one two three that’s your present value but we wanna change the sign on that because it’s going to be an outflow so plus minus minus 90 000 present value all right future value is 100 000 future value we know the n is three all right there’s going to be no payments

No coupons so now we go compute i y and this will be our annual interest rate our annual interest rate is 3.57 percent all right that’s the market rate that’s the annualized market rate for this problem all right let’s do another problem all right this could come in handy if you’re gonna buy a house um so let’s say you you have a you buy a house and it’s going

To cost you 500 000 you’re going to need to borrow 30 500 000 over 30 years to finance the purchase of this house now you’re going to have to pay the bank back every single month until until they’re made whole so over the next 30 years you’re going to have to make periodic monthly payments to pay off that 500 000 loan all right and it’s fully amortizing means

Every single month you’re paying back both principal and interest so we all we want to do here is to figure out what the payment is what is that monthly payment so we know the present value it’s going to be 500 000. let’s just put present value let’s keep it as a positive number this time five hundred thousand dollars is present value the future value is zero

In other words after 30 years you will have completely paid off this loan because it’s fully amortizing so zero is the future value now here’s the thing because you want to figure out the monthly payment there’s actually going to be more than 30 payments there’s 30 years and every single month you’re going to make a payment so there’s really 360 payments so n

Is 360. 30 times 12. and also the monthly interest rate we we’ve written down an annual interest rate of 4 percent but really the month because we’re working in months here the monthly interest rate is simply 4 divided by 12 and that’s 0.333 so that’s going to be our i y so now we’re just going to compute our payment cpt payment every single month we’re going

To have to pay 2 387. all right that’s what our payment is going to be now i started this problem off as a positive present value of 500 000. had i written a negative for that present value of 500 000 then the payment would have been a positive number all right it’s just going to be the opposite side of whatever i put in there for the for the present value all

Right let’s look at another problem here now let’s get to uneven cash flows and you might see this if you’re valuing a company you know and you’re looking at a discounted cash flow model so let’s let’s look at this you you see a company in the first year it’s gonna it’s gonna throw off eighty five thousand dollars in cash the second year it’s going to throw up

Ninety five thousand dollars in cash the third year it it’s gonna throw up a hundred and five thousand dollars in cash and then there’s also going to be a terminal value you’re gonna sell this company at the end of three years and so your total cash flow stream is at the bottom eighty five ninety five and five hundred fifty thousand 000 all right for this kind of

Problem we’re going to use these buttons up here okay the second row up the npv and this is cash flow numbers okay so the first thing you do is there’s no immediate outflow okay there’s no immediate output so cf0 is going to be zero so what i do is i start with cf here and it gives me enough now i’ve already done a problem in here before so i need to clear this

Out all right so the way i need to clear it out is i hit this second function here second and then i hit clear work down here at the bottom now it’s wiped out all of my cash flow net present value calculations so now it says okay what is my cf0 let’s put in zero for that and hit enter okay there’s no immediate outflow c01 that’s my cash flow for the first period

The first year and we see that’s a positive eighty five thousand dollars i’m going to put that in now hit enter now i’m going to hit this down arrow here and it tells me it gives me a number one this is the frequency of the payment so in other words i’m only getting one payment for the year of 85 000 so it’s only one it comes up with one usually as a default so

I’m good with that so let’s hit the down arrow again and now it tells me to enter this the second cash flow c02 so let’s punch that in 95 000 and hit enter and the down arrow and again one period so we’re good down arrow again and now we’re going to our final year 50 55 000 is our third cash flow which is both the cash flow plus the terminal value 555 two three

Hit enter down arrow okay let’s say 10 hour again now it says i can keep going but there’s no more cash payments so at this point what i want to do is i go ahead and i hit npv net present value now it tells me okay you need to enter an interest rate okay so i if you go back to the problem i’m assuming a discount rate of four percent so i’m going to hit four here

And enter and then i’m going to hit the the the down arrow and then it says npv equals zero it’s telling me to you know go ahead and compute the npv so let’s compute it the present value is 662 956.59 662. and if you look at the problem itself it makes sense right your the present value is going to be a number that’s greater than the sum of those three numbers

At the bottom but not a lot greater right so um it’s not a lot less it’s not the present value is going to be a value that’s excuse me that’s less than the sum of the cash flows at the bottom because we’re discounting those back to the present each one at four percent now i could have discounted each one of those back separately at four percent and then summed up

The three and i should get the same number if i do it correctly i should get 662 000 and change all right so that’s the net present value of a series of cash flows so you know i would be willing if i’m using a discount rate of four percent i’d be willing to pay six hundred sixty three thousand dollars for this company if my weighted average cost of capital was

Four percent all right let’s take a look at another question here so remember net present value and irr so a lot of times you want to just calculate the net present value and you know what the outflow is and then you know what the inflows are and you know what your discount rate is so the net present value is calculated by discounting both outflows and inflows

All right so you have a cf 0 in this case also the irr at the bottom the internal rate of return is simply the interest rate that equates the cash outflows with the cash inflows when we discount it back so the present value of everything equals zero it’s what is that interest rate so i’ve written those two equations down here for you and let me let me give you a

Couple of examples let’s say instead now this is the same problem but we’re going to say that there’s an immediate need for a cash outflow of six hundred thousand so maybe a company has approached you and said we are willing to sell you our company for six hundred thousand dollars and you have analyzed it and you estimate that in year one you can earn 85 000 in

Year two ninety five and year three five hundred fifty five thousand and then you’ll be out of the investment so the question is are you willing to do this deal are you willing to pay six hundred thousand if we get a positive net present value the answer is yes so let’s go ahead and do this problem so let’s get cf and let’s remember we’ve already got a problem

In here so let’s clear it out let’s hit second and then clear work okay now let’s go ahead and hit enter there so so let’s let’s kind of start over here and hit hit um six hundred thousand but it’s an outflow so let’s change the sign of that minus six hundred thousand oh i’m sorry the the way to start it is first you hit cf okay sorry six cf so we’re gonna hit

Six hundred thousand and then we’re gonna change the sign of that plus minus down here at the bottom and hit enter so that’s our immediate outflow now our first inflow is going to be 85 000 enter down arrow and it’s a one that’s perfect we’re only getting one of those per year now we’re going to get one payment of 95 000 in year two enter down here and there’s

My one payment fo2 and then finally i’m going to make 555 thousand dollars enter down arrow f03 let’s just see let’s just make sure c04 is empty and it is and that’s good okay so i want to calculate the net present value so let’s go ahead npv and again it’s going to ask me for my interest rate so let’s put in four enter down arrow now it says go ahead and hit

The compute it even tells you up top it prompts you to hit compute cpt and now my cpt is 62 000 positive 662 thousand nine hundred fifty seven dollars and all this is is simply the difference between the original 662 957 and the 600 000 outflow okay so the net present value is positive so yes i am willing to spend 600 000 on this project to get a positive net

Present value project all right let’s do one last problem uneven cash flows this one is just the same problem but we’re going to do calculate the internal rate of return instead so remember the internal rate of return is the essentially the interest rate that you’re going to earn on this project so the way to do this is again you want to clear everything out

So hit second see clear work even though all the numbers are really going to be the same let’s go ahead and hit cf up it hasn’t been cleared out yet so once i hit cf i see there’s numbers in there let’s hit second and clear work okay so 600 000 is going to be the first outflow change that sign to minus enter down arrow cl1 is 85000 enter down arrow and it’s

Fo1 that’s perfect down arrow again co2 is 95 000. enter down arrow okay fo2 is one perfect down arrow again 555 000 enter down arrow fo three zero perfect hit it hit it again there’s nothing in co4 so we’re good now here i’m just going to hit irr and it should give me an answer so let’s try that uh irr and it says okay are you ready to compute go ahead and

Hit compute cpt and now it’s thinking it takes a little minute a minute to calculate because it’s not actually a very easy calculation to do but they give me a calculation of 8.05 percent so that is the internal rate of return on this series of cash flows so and remember given that my weighted average cost of capital or my discount rate that i used was only

Four percent you can think of that as a hurdle rate if your irr is greater than your hurdle rate then you want to accept the project in this case it’s much higher it’s eight percent versus my irr which versus my discount rate which is four percent and therefore i accept this project all right so that is a short tutorial on how to use a ba2 plus and my one

Recommendation is if you’re ever going to use this on an exam you should practice a handful of problems like this so that when it comes time to under time pressure you’re able to accomplish these tax tasks very quickly all right thank you

Transcribed from video

How to Use a Financial Calculator By Ric ThomasliveBroadcastDetails{isLiveNowfalsestartTimestamp2021-06-12T155845+0000endTimestamp2021-06-12T161707+0000}