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TI 83 and TI 83 Plus Tutorial

http://uwacadweb.uwyo.edu/sanning/TI83_Help_File.htm

The TI 83 is a fairly easy, but more difficult than most, to use financial calculator which will serve you well in all finance courses. This tutorial will demonstrate how to use the financial functions to handle basic time value of money problems. I will keep the examples rather elementary, we will cover more difficult problems in class. There is one adjustment which needs to be made before using this calculator. By default the TI 83 displays only two decimal places. This is not enough. Personally, I like to see five decimal places, but you may prefer some other number. To change the display, press the Mode key, then the down arrow key one (to the Float line). Next, use the right arrow key to highlight the 5 and press Enter. Finally, press 2nd Mode to exit the menu. That's it, the calculator is ready to go.

We'll begin with a very simple problem which will provide you with most of the skills to perform financial math on the TI 83: Suppose that you have $100 to invest for a period of 5 years at an interest rate of 10% per year. How much will you have accumulated at the end of this time period? In this problem, the $100 is the present value (PV), N is 5, and i is 10%. Before entering the data you need to put the calculator into the TVM Solver mode. Press 2nd then X-1 then Enter (on the TI 83 Plus, press the Apps button, choose the Finance menu, and then choose TVM Solver) . Your screen should now look like the one in the picture. Enter the data as shown in the picture making sure that PMT is set to 0. Now to find the future value simply scroll down to the FV line and press Alpha then Enter. The answer you get should be 161.05.

A Couple of Notes
1. Every time value of money problem has either 4 or 5 variables (corresponding to the 5 basic financial keys). Of these, you will always be given 3 or 4 and asked to solve for the other. In this case, we have a 4-variable problem and were given 3 of them (N, I/Y, and PV) and had to solve for the 4th (FV). To solve these problems you simply enter the variables that you know on the appropriate lines and then scroll to the line for the variable you wish to solve for. To get the answer press Alpha Enter. Be sure that any variables not in the problem are set to 0, otherwise they will be included in the calculation. 2. The order in which the numbers are entered does not matter. 3. Always make sure that the P/Y (payments per year) and C/Y (coupons per year) are set to 1. At least this is what I prefer. Since these are visible on the screen at all times, it is not strictly necessary. If you can remember to change these to the appropriate values for each problem (1 for annual compounding, 12 for monthly compounding, etc) then you'll have no problems. 4. When we entered the interest rate, we input 10 rather than 0.10. This is because the calculator automatically divides any number entered on the I/Y line by 100. Had you entered 0.10, the future value would have come out to 100.501 -- obviously incorrect. 5. Notice that we entered the 100 in the PV key as a negative number. This was on purpose. Most financial calculators (and spreadsheets) follow the Cash Flow Sign Convention. This is simply a way of keeping the direction of the cash flow straight. Cash inflows are entered as positive numbers

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3/14/2012 5:25 PM

TI 83 and TI 83 Plus Tutorial

http://uwacadweb.uwyo.edu/sanning/TI83_Help_File.htm

and cash outflows are entered as negative numbers. In this problem, the $100 was an investment (i.e., a cash outflow) and the future value of $161.05 would be a cash inflow in five years. Had you entered the $100 as a positive number no harm would have been done, but the answer would have been returned as a negative number. This would be correct had you borrowed $100 today (cash inflow) and agreed to repay $161.05 (cash outflow) in five years. Do not change the sign of a number using the "minus" key. Instead, use the (-) key. 6. We can change any of the variables in this problem without needing to re-enter all of the data. For example, suppose that we wanted to find out the future value if we left the money invested for 10 years instead of 5. Simply enter 10 on the N line and solve for FV. You'll find that the answer is 259.37.

Suppose that you are offered an investment which will pay you $1,000 per year for 10 years. If you can earn a rate of 9% per year on similar investments, how much should you be willing to pay for this annuity? In this case we need to solve for the present value of this annuity since that is the amount that you would be willing to pay today. Enter the numbers onto the appropriate lines: 10 into N, 9 into I/Y, 1000 (cash inflow) into PMT, and 0 for FV. Move to the PV line and press Alpha Enter to solve the problem. The answer is -6,417.6577. Again, this is negative because it represents the amount you would have to pay (cash outflow) today to purchase this annuity. Now, suppose that you will be borrowing $1000 each year for 10 years at a rate of 9%, and then paying back the loan immediate after receiving the last payment. How much would you have to repay? All we need to do is to put a 0 into PV to clear it out, and then solve for FV to find that the answer is -15,192.92972 (a cash outflow).

This is where the TI 83 is considerably more difficult than most other financial calculators. Its not too bad one you get used to it, but it is more difficult than necessary. Still, you use what you've got, so lets plunge in. First, exit from the TVM Solver menu by pressing 2nd Mode and then press 2nd X-1 to return to the finance menu. To find the present value of an uneven stream of cash flows, we need to use the NPV function. This function is defined as: NPV( Rate, Initial Outlay, {Cash Flows}, {Cash Flow Counts}) Note that the {Cash Flow Counts} part is optional and we will ignore it here, but we will discuss it in class. Suppose that you are offered an investment which will pay the following cash flows at the end of each of the next five years: Period Cash Flow 0 0 1 100 2 200 3 300 4 400 5 500

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3/14/2012 5:25 PM

TI 83 and TI 83 Plus Tutorial

http://uwacadweb.uwyo.edu/sanning/TI83_Help_File.htm

How much would you be willing to pay for this investment if your required rate of return is 12% per year? We could solve this problem by finding the present value of each of these cash flows individually and then summing the results. However, that is the hard way. Instead, we'll use the NPV function. To begin, scroll down in the finance menu until you get to the line that reads NPV(. Press Enter to select that function, and you will see the beginning of the NPV function on your screen. Now, complete the function as follows: NPV(12,0,{100,200,300,400,500}) Press Enter to solve the function and we find that the present value is $1,000.17922. Note that you can easily change the interest rate by pressing the 2nd Enter to retrieve the function, and then using the arrow keys to edit it. For example, to change the rate to 10%, press 2nd Enter and then use the arrow keys to move to the interest rate and type 10. Press Enter and you will find that the answer is now $1,065.25883. Now suppose that we wanted to find the future value of these cash flows instead of the present value. There is no function to do this so we need to use a little ingenuity. Realize that one way to find the future value of any set of cash flows is to first find the present value. Next, find the future value of that present value and you have your solution. In this case, we've already determined that the present value is $1,000.17922, so we'll recall the NPV function by pressing 2nd Enter. Now, add * 1.12 ^ 5 to the end of the function, so that it now looks like: NPV(12,0,{100,200,300,400,500})*1.12^5 Press Enter, and you will see that the future value of these cash flows is $1,762.65754. Pretty easy, huh? Ok, at least its easier than adding up the future values of each of the individual cash flows. It does require you to know the equation for the future value of a lump sum, but you ought to know that anyway.

Calculating the net present value (NPV) and/or internal rate of return (IRR) is virtually identical to finding the present value of an uneven cash flow stream as we did in Example 3. Suppose that you were offered the investment in Example 3 at a cost of $800. What is the NPV? IRR? To solve this problem we must not only tell the calculator about the annual cash flows, but also the cost (previously, we set the cost to 0 because we just wanted the present value of the cash flows). Generally speaking, you'll pay for an investment before you can receive its benefits so the cost (initial outlay) is said to occur at time period 0 (i.e., today). To find the NPV recall the NPV function and edit it so that the initial outlay (previously 0) is -800. Press Enter to get the solution and you'll see that the NPV is $200.17922. Solving for the IRR is done in a similar way, except that we'll use the IRR function. This function is defined as: IRR( Initial Outlay, {Cash Flows}, {Cash Flow Counts}) For this problem, the function is: IRR(-800, {100,200,300,400,500}) Again, note that the {Cash Flow Counts} part is optional and we will ignore it here, but we will discuss it in class. To get the IRR function on the screen, press 2nd X-1 to return to the finance menu, and scroll down until you see IRR(. Enter the function as shown above and then press Enter to get the answer

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3/14/2012 5:25 PM

TI 83 and TI 83 Plus Tutorial

http://uwacadweb.uwyo.edu/sanning/TI83_Help_File.htm

(19.5382%).

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