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44 Section 3: Basic Financial Functions
File name: hp 12c pt_user's guide_English_HDPMF123E27 Page: 44 of 275
Printed Date: 2005/8/1 Dimension: 14.8 cm x 21 cm
Financial Calculations and the Cash Flow Diagram
The concepts and examples presented in this section are representative of a wide
range of financial calculations. If your specific problem does not appear to be
illustrated in the pages that follow, don’t assume that the calculator is not capable
of solving it. Every financial calculation involves certain basic elements; but the
terminology used to refer to these elements typically differs among the various
segments of the business and financial communities. All you need to do is identify
the basic elements in your problem, and then structure the problem so that it will
be readily apparent what quantities you need to tell the calculator and what
quantity you want to solve for.
An invaluable aid for using your calculator in a financial calculation is the cash
flow diagram. This is simply a pictorial representation of the timing and direction
of financial transactions, labeled in terms that correspond to keys on the calculator.
The diagram begins with a horizontal line, called a time line. It represents the
duration of a financial problem, and is divided into compounding periods. For
example, a financial problem that transpires over 6 months with monthly
compounding would be diagrammed like this:
The exchange of money in a problem is depicted by vertical arrows. Money you
receive is represented by an arrow pointing up from the point in the time line when
the transaction occurs; money you pay out is represented by an arrow pointing
down.
Suppose you deposited (paid out) $1,000 into an account that pays 6% annual
interest and is compounded monthly, and you subsequently deposited an
additional $50 at the end of each month for the next 2 years. The cash flow
diagram describing the problem would look like this: