UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Calculator (Hewlett-Packard 10BII) Tutorial To begin, look at the face of the calculator. Most keys (except a few) have two functions: Each key s primary function is noted in white on the upper portion of the face of the key, while the secondary function is noted in gold on the lower portion of the key. To use the primary (white) function, simply press the key. To use the secondary (gold) function, first press the key with the gold lower face, which we will call the gold shift key, and then press the desired function key. (Note that the gold shift key is more orange or brick in color and is the third key from the bottom on the left side of the calculator keyboard.) A third function is written in purple above some keys. We will not be using these functions in this class. Turning the Calculator On and Off To turn the calculator on, press ON Note that the ON key is in the lower left corner of the keyboard. ON is printed in white on the face of the key, while OFF (in gold) appears below the word ON. Keys are designated throughout this tutorial by the use of small boxes, as shown above. To conserve the battery, the calculator turns itself off about ten minutes after your last keystroke. To turn the calculator off, press OFF By pressing the gold shift key first, you activate the gold (lower) function on the lower-left key, which is the off function. Note that pressing the gold shift key places the word SHIFT in the lower left corner of the display. Press the gold shift key again and the symbol disappears. The gold shift key is a toggle key that switches back and forth between the white and the gold functions included on most keys. After you press the gold shift key, look only at the gold (lower) functions on the keys. Clearing the Calculator Note that the calculator has a continuous memory, so turning it off does not affect data stored in the calculator. To clear the calculator s memory, press C ALL Clearing the calculator is important because unwanted data in memory can cause improper calculations and, hence, wrong answers. Get into the habit of clearing memory before starting every Copyright 2010 Health Administration Press 1
calculation. Occasionally, you may purposely want to save data, but in general you will be entering all new data, so starting with a clear memory is the safest approach. There are three different levels of data you can clear: C ALL clears all memory and the display. clears the entire display, but not the memory. C Entering Values clears numbers on the display one at a time if you made a mistake entering data. To enter values (numbers) into the calculator, press the desired number keys. The values will appear in the display. If you are entering values with decimal places, press the decimal point key as necessary. (It is the middle key in the lower row.) Changing the Number of Decimal Places Shown in the Display To change the number of decimal places displayed to 4, press When 5555.5555 is entered, 555.5555 is displayed. DISP 4 To change from 4 places to 2, press DISP 2 5,555.56 is displayed. (Rounding is automatic.) We usually set the calculator to display 2 places, which is especially convenient when working with dollars and percentages. PEND in the display means something is pending. Press 4 The calculator is waiting for the denominator, so PEND appears in the display. Press 6 and = to get 0.67. Periods per Year Setting One important setting that can cause problems is the periods per year setting. To check the current setting, press C ALL Copyright 2010 Health Administration Press 2
The display briefly shows the setting for periods/year. To keep the display on, hold down the C ALL key. The calculator comes preset at 12 periods per year that is, it assumes calculations will be done on a monthly basis. However, our illustrations will be done on an annual basis, so we must use 1 period/year. To change the setting: Press 1 P/YR Now the calculator is set to assume 1 period/year. To confirm this setting, proceed as above. Unless you need to change this setting for other work, leave the calculator setting at 1 period per year. Time Value of Money (TVM) The TVM keys are located in the top row of the keyboard. Although there are five TVM keys, time value analysis generally involves four variables three are known, and the fourth is unknown. Lump Sums To begin, we consider TVM calculations with single (lump) sums. In this situation, we do not use the PMT key, so be sure to either clear all, which sets the payment (PMT) equal to 0, or enter 0 as the Copyright 2010 Health Administration Press 3
PMT when entering the input data. If you know any three variables, you can find the value of the fourth. Example 1 What is the FV of $100 after 3 years if the interest rate is 26 percent? First, clear the calculator. Next, enter the data. 3 N 26 I/YR 100 PV 0 PMT (Optional if the calculator is cleared) To determine the FV, simply press FV, and the FV of 200.04 appears in the display. The calculator is programmed so that if the PV is positive, the resulting FV is displayed as negative, and vice versa. In essence, the calculator assumes that one is an inflow and the other is an outflow. When entering both PV and FV, one must be entered as negative and the other as positive. Example 2 What is the PV of $500 due in 5 years if the interest rate is 10 percent? Clear first and then enter the following data. 5 N 10 I/YR 0 PMT (Optional if the calculator is cleared) 500 FV Pressing the PV key reveals that $310.46 will grow to $500 in 5 years at a 10 percent rate. (Ignore the minus sign for now.) Copyright 2010 Health Administration Press 4
Example 3 Assume a bond can be purchased today for $200. It will return $1,000 after 14 years. The bond pays no interest during its life. (It is a zero-coupon bond.) What rate of return would you earn if you bought the bond? 14 N 200 +/ PV (The first key changes the sign.) 0 PMT (Optional if the calculator is cleared) 1000 FV Simply press the I/YR key, and the rate of return (12.18) appears in the display. Remember that the calculator is programmed so that if the PV is positive, the FV is displayed as negative, and vice versa. When entering both PV and FV values, one must be entered as a negative and one as a positive. The +/ key changes the sign of the value being entered. Now suppose you learn that the bond will actually cost $300. What rate of return will you earn? Override the 200 by entering 300 +/ PV, and then press I/YR to get 8.98 percent. If you pay more for the bond, you earn less on it. The important thing, though, is that you can do what if analyses with the calculator. Ordinary Annuities Example 1 What is the FV of an annuity of $100 paid at the end of each year for 5 years if the interest rate equals 6 percent? 5 N 6 I/YR 0 6% 1 2 3 4 5 $100 $100 $100 $100 $100 0 PV (Optional if the calculator is cleared) 100 +/ PMT Simply press the FV key, and 563.71 appears in the display. Copyright 2010 Health Administration Press 5
Example 2 What is the PV of the same annuity? Leave the data in the calculator, but enter 0 FV to override; then press PV to get 421.24. The FV must be changed to zero because the calculator recorded 563.71 as the FV in the previous operation. Annuities Due Each payment of an annuity due occurs at the beginning of the period instead of at the end as with a regular annuity. In essence, each payment is shifted one period to the left in an annuity due. To analyze annuities due, press BEG/END The word BEGIN appears on the screen. Then proceed as above. To change back to the end of period mode, press again. BEG/END Interest Conversion The effective annual rate (EAR) equation can be used to convert a stated rate to an EAR. However, it is much easier to use the calculator. Given: I Stated = 10% and M = 12 payments/year: 10 12 NOM P/YR EFF% Then, 10.47 (percent) appears in the display. Be sure to switch back to 1 payment per year: 1 P/YR Copyright 2010 Health Administration Press 6
Uneven Cash Flow Streams Example 1: Finding Present Values Assume the following cash flows: What is the PV of these CFs? 0 CFj Sets CF 0 equal to 0. 0 10% 1 2 3 4 $0 $50 $100 $150 $200 First clear the calculator and make sure that periods/year is set equal to 1. 50 CFj Sets CF 1 equal to 50. 100 CF 150 CF 200 CF j j j And so on. 10 I/YR This function enters the interest (discount) rate. At this point, all of the relevant information has been entered into the calculator. To find the PV, press NPV, and the value $377.40 will appear in the display. Note that NPV stands for net present value, or the sum of the present values of two or more cash flows. Example 2: Rate of Return (IRR) Assume that we invest $1,000 now (t = 0) and then expect to receive the following cash inflows: 0 1 2 3 4 $1,000 $300 $400 $200 $600 What rate of return is expected on this investment? Clear the calculator, and then enter the following: 1000 +/ CF j 300 CF j 400 CF j Copyright 2010 Health Administration Press 7
200 CF j 600 CF j Then press IRR/YR The answer 16.71 (percent) appears in the display. You can also determine the NPV of the investment. Leave data entered, and then enter the opportunity cost (discount) rate, say 8 percent: 8 I/YR NPV The NPV of 220.50 appears in the display. Thus, the PV of the cash inflows exceeds the cost of the investment by $220.50. Amortization The calculator can be used to create amortization schedules. Example Determine the interest and principal paid each year and the balance at the end of each year on a threeyear $1,000 amortized loan that carries an interest rate of 10 percent. The payments are due annually. First check payments/year and make sure it is 1. Also clear the calculator. Then perform the following steps: 3 N 10 I/YR 1000 PV PMT The value 402.11 appears in the display, which is the amount of each annual payment. Here is the amortization schedule corresponding to the loan: Copyright 2010 Health Administration Press 8
Year Beginning Balance Payment Interest Principal Repayment Ending Balance 1 1,000.00 402.11 100.00 302.11 697.89 2 697.89 402.11 69.79 332.32 365.57 3 365.57 402.11 36.56 365.55.02 With the data still entered in the calculator, do the following to calculate the values in the above table: 1 INPUT AMORT ( 1-1 appears in the display.) = PRIN and 302.11 appear in the display. = INT and 100 appear in the display. = 697.89 appears in the display. Repeat the steps, starting with AMORT two more times to complete the table. Copyright 2010 Health Administration Press 9