HP 113394 User Guide - Page 44

44 Section 3: Basic Financial Functions 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: 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