Principles of Finance · free preview
Solving Time Value Problems Systematically
Every time value problem is solved the same way, identify the four variables on a timeline, solve for the unknown with the formula or a financial calculator, and the systematic habit prevents the sign and timing errors that produce wrong answers from right inputs.
1. The four-variable discipline
The four-variable discipline
2. Signs and cash flow direction
Signs and cash flow direction
3. Calculator and spreadsheet methods
Calculator and spreadsheet methods
4. Reasonableness checks
Reasonableness checks
5. The rate-matching rule
A loan is quoted at 12 percent compounded monthly over three years. Which rate and count should enter the time value calculation?
6. The sign convention's purpose
Why do calculator and spreadsheet TVM functions require outflows and inflows to carry opposite signs?
7. Choosing the method
Which statement about the three solution methods, formula, financial calculator, and spreadsheet functions, is correct?
8. The direction audit
At a positive interest rate, which computed pair fails the direction audit for moving money?
9. The magnitude audit
A student computes that 1,000 dollars at 4 percent grows to about 1,020 dollars in ten years. Which audit catches the mistake?
10. Perspective in signs
A bank computes your loan payment treating the loan amount as positive to you. What sign do your payments carry in the bank's setup?
11. The period count register
What single-letter name do financial calculators use for the number of periods register? Write the letter.
12. The recurring payment register
What three-letter name do financial calculators use for the recurring payment register, zero in single-payment problems? Write the letters.
13. The one-line estimate
What Rule of 72 estimate says money doubles in 72 divided by the rate percent? Answer with two words.
14. The unknown in discounting
In present value calculations, which of the four variables is typically the unknown being solved for? Answer with two words.
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