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I'm having some issues understanding how TVM calculators as compared to the present value formula works, they should give the same result but they don't. The questions is:

Suppose you are considering purchasing a financial asset that promises to pay €1,000 per year for five years, with the first payment one year from now. The required rate of return is 12 percent per year. How much should you pay for this asset?

The book gives following solution:

To find the value of the financial asset, use the formula for the present value of an ordinary annuity given in Equation 11 with the following data:

A = €1,000
r = 12% = 0.12
N = 5
PV = A[ (1 - 1 / (1+r)^N ) / r ]
 = €1,000[ (1−1(1.12)^5 ) / 0.12 ]
 = €1,000(3.604776)
 = €3,604.78

The series of cash flows of €1,000 per year for five years is currently worth €3,604.78 when discounted at 12 percent.

When using TVM functions on the TI BA calculator:

[CLR TVM]
1000 [PMT]
0.12 [I/Y]
5    [N]
[CPT][PV] displays -4982.05

So one is 3604.78, the other is 4982.05, why different? What am I doing wrong?

1 Answer 1

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Your calculator most definitely takes the interest rate as a whole percentage number rather than a decimal. try inputting 12 for [I/Y] rather than .12. If you still have issues make sure your calculator is in END or BGN mode appropriate for the problem

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  • Ah, that was indeed the issue, after I input 12 as the I/Y key, it correctly shows 3604.78 as the PV. Thanks!
    – fluter
    Jan 30 at 15:03

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