AuthorTopic: BAII Plus Professional Tutorial
@2009-11-22 19:42:23
Here is an article by Mayes.

The TI BAII Plus Professional is a fairly easy 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.

Unlike other financial calculators, the BAII Plus comes from the factory set to assume annual compounding (others default to monthly compounding which is less than optimal). That's exactly what I have been wanting for years. Why? Well, the compounding assumption is hidden from view and in my experience people tend to forget to set it to the correct assumption. Of course, most people don't recognize a wrong answer when they get one, so they blithely forge ahead. If you ever wish to change the compounding assumption (which I don't recommend), press 2nd then I/Y and enter the number of periods per year (12 for monthly, 2 for semiannual, etc). Now press Enter and then 2nd CPT (Quit) to return to a blank screen.

One adjustment is important. By default the BAII Plus Professional 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 2nd key, then the decimal point key, and, when prompted, enter the number of digits you would like to see displayed. You must then press the Enter key to lock in your choice. I would press 2nd, ., 5, Enter, 2nd CPT (Quit) to display 5 decimal places. That's it, the calculator is ready to go.

Example 1 - Lump Sums
We'll begin with a very simple problem which will provide you with most of the skills to perform financial math on the BAII Plus Professional:

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/Y is 10%. Before entering the data you need to make sure that the financial registers (each key is nothing more than a memory register, and you can recall the values with the RCL key) are clear. Otherwise, you may find that numbers left over from previous problems will interfere with the solution to this one. Press 2nd then FV to clear the memory. Now all we need to do is enter the numbers into the appropriate keys: 5 into N, 10 into I/Y, -100 into PV. Now to find the future value simply press CPT (compute) and then the FV key. The answer you get should be 161.05.

A Couple of Notes
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 in the appropriate keys and then press the other key to get the answer.
The order in which the numbers are entered does not matter.
When we entered the interest rate, we input 10 rather than 0.10. This is because the calculator automatically divides any number entered into the I/Y key by 100. Had you entered 0.10, the future value would have come out to 100.501 -- obviously incorrect.
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 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.
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 into the N key and solve for FV. You'll find that the answer is 259.37.
Example 2 - Annuities
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. Press 2nd FV to clear the financial keys. Enter the numbers into the appropriate keys: 10 into N, 9 into I/Y, and 1000 (cash inflow) into PMT. Now press CPT PV to solve for the present value. 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 press CPT FV to find that the answer is -15,192.92972 (a cash outflow).

Example 3 - Uneven Cash Flows
In addition to the previously mentioned financial keys, the BAII Plus also has a key labeled CF (the cash flow key) to handle a series of uneven cash flows.

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

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 cash flow key (CF). All we need to do is enter the cash flows exactly as shown in the table. Again, we must clear the cash flow registers first. In this case we need to press 2nd CE/C (2nd FV will have no effect on the cash flow registers). The calculator will prompt you to enter each cash flow and then the frequency with which it occurs. For now, just accept the default of 1 each time. Now, press CF then 0 Enter down arrow, 100 Enter down arrow (twice), 200 Enter down arrow (twice), 300 Enter down arrow (twice), 400 Enter down arrow (twice), and finally 500 Enter down arrow (twice). Now, press the NPV key and enter 12 Enter down arrow when prompted for the interest rate. To get the present value of the cash flows, press the down arrow key and then the CPT key. We find that the present value is $1,000.17922. Note that you can easily change the interest rate by pressing the up arrow key to get back to that step. Press 2nd CPT to exit from this calculation.

Now suppose that we wanted to find the future value of these cash flows instead of the present value. Unlike most other financial calculators, the BAII Plus Professional can do this easily. Since we have already entered the cash flows, just press NPV and enter the interest rate if necessary. Now, press down arrow twice to get to NFV (Net Future Value). Press CPT and you'll see that the future value of these cash flows at 12% per year is $1,762.6575. Pretty easy, huh? (Ok, at least its easier than adding up the future values of each of the individual cash flows.)

Example 4 - NPV and IRR
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 or IRR, first clear the cash flow registers and then enter -800 into CF, then enter the remaining cash flows exactly as before. For the NPV we must supply a discount rate, so enter 12 into I when prompted, and then Enter down arrow and CPT. You'll find that the NPV is $200.17922. Solving for the IRR is done exactly the same way, except that the discount rate is not necessary. This time, you'll press IRR and then CPT, and you'll find that the IRR is 19.5382%.
@2009-11-28 19:43:52

CFA Discussion Topic: BAII Plus Professional Tutorial

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I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz

Tamara Schultz