Posted by John Behle on March 15, 2000 at 13:12:21:
The formulas are all built into financial calculators. It is tedious and counter productive to calculate them by hand and extremely hard when there are multiple cash flows or uneven cash flows.
On a financial calculator you have 5 registers. Enter any 4 of the 5 and you can solve for the fifth. When it comes to discounting a simple amortized note, you enter the figures of the loan and then substitute the yield you want for the interest rate and re-calculate the PV or present value.
The keys are:
N - - This is for the number. Usually it is in months.
I - - This is the interest rate or yield.
PMT - This is the periodic payment. Usually monthly.
PV - - This is the Present value. Today’s value or balance.
FV - - This is the Future Value. A value or balance at a future date.
Usually on a simple note with only one cash flow you arer using just four of the keys. The FV will need to be entered as a zero. If you are dealing with a balloon note, the PMT would be zero and you would use the FV key.
So, if I had a $10,000 note at 10% interest with payments of $87.76 per month for 360 months, here is how I would enter it into the calculator and discount it to an 18% yield.
10 I (on some calculators you may need to divide by 12)
-10000 PV (negative because it is an investment or money out)
I press PMT and it comes up with a payment of $87.76 (we’re not going to worry about the rounding in this example)
For a yield of 18%, I enter 18 into the I% register. Then I re-calculate for PV and come up with - $-5822.97
That’s just a simple synopsis. The book “Discounting as easy as 1,2,3” covers it in details. “Advanced Discounting and Negotiation Techniques” addresses partials, staged funding and more sophisticated cash flows and purchase options.
Or, as an alternative, Jon Richards has a book titled “Calculator Power”