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134 PART 2 Important Financial Concepts
calculated. (Occasionally, all five of the keys are used, with one representing the
unknown value.) The keystrokes on some of the more sophisticated calculators
are menu-driven: After you select the appropriate routine, the calculator
prompts you to input each value; on these calculators, a compute key is not
needed to obtain a solution. Regardless, any calculator with the basic future and
present value functions can be used in lieu of financial tables. The keystrokes
for other financial calculators are explained in the reference guides that accompany
them.
Once you understand the basic underlying concepts, you probably will want
to use a calculator to streamline routine financial calculations. With a little
practice, you can increase both the speed and the accuracy of your financial
computations. Note that because of a calculator’s greater precision, slight differences
are likely to exist between values calculated by using financial tables and
those found with a financial calculator. Remember that conceptual understanding
of the material is the objective. An ability to solve problems with the aid of
a calculator does not necessarily reflect such an understanding, so don’t just settle
for answers. Work with the material until you are sure you also understand
the concepts.
Computers and Spreadsheets
Like financial calculators, computers and spreadsheets have built-in routines that
simplify time value calculations. We provide in the text a number of spreadsheet
solutions that identify the cell entries for calculating time values. The value for
each variable is entered in a cell in the spreadsheet, and the calculation is programmed
using an equation that links the individual cells. If values of the variables
are changed, the solution automatically changes as a result of the equation
linking the cells. In the spreadsheet solutions in this book, the equation that
determines the calculation is shown at the bottom of the spreadsheet.
The ability to use spreadsheets has become a prime skill for today’s managers.
As the saying goes, “Get aboard the bandwagon, or get run over.” The spreadsheet
solutions we present in this book will help you climb up onto that bandwagon!
Basic Patterns of Cash Flow
The cash flow—both inflows and outflows—of a firm can be described by its general
pattern. It can be defined as a single amount, an annuity, or a mixed stream.
Single amount: A lump-sum amount either currently held or expected at
some future date. Examples include $1,000 today and $650 to be received at
the end of 10 years.
Annuity: A level periodic stream of cash flow. For our purposes, we’ll work
primarily with annual cash flows. Examples include either paying out or
receiving $800 at the end of each of the next 7 years.
Mixed stream: A stream of cash flow that is not an annuity; a stream of
unequal periodic cash flows that reflect no particular pattern. Examples
include the following two cash flow streams A and B.