BAII Plus Tutorial

The Texas Instruments BAII Plus 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 elementary since this is just an introduction. Please note, there are several versions of the BA II Plus calculator. This tutorial was written for the original version. The information contained here can be applied easily with newer versions of the calculator, frequently without any changes to the key strokes.

Setup

Before we get started, we need to correctly configure the calculator.  The BAII Plus comes from the factory set to assume monthly compounding (12 periods per year).  I prefer that you set the calculator to assume annual compounding and then make manual adjustments when you enter numbers.  Why?  Because, the compounding assumption is hidden from view and in my experience people tend to forget to set it to the correct period.  Of course, most people don't recognize a wrong answer when they get one, so they continue working wondering why they are getting the incorrect answers. 

To fix this problem press 2nd then I/Y and enter 1 when prompted.  Now press Enter and then 2nd, CPT (compute which is in the upper left-hand of the calculator display panel) to return to a blank screen.  Problem solved.

One other adjustment is important.  By default the BAII Plus displays only two decimal places.  This is not enough.  Personally, I like to see at least four decimal places for students using this calculator. 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, 4 and Enter to display 4 decimal places.  That's it, the calculator is ready to go. Please note that I assume throughout the following examples that you have set your BAII Plus as described previously. If you have not then you will need to apply the mathematics for your chosen compounding periods to achieve the same results.

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 and assumes the calculator is set as I described above:

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 is 10%.  Before entering the data you need to make sure that the financial registers (each key is nothing more than a memory register) 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 which is in the upper left-hand portion of this version of the BAII Plus) and then the FV key.  The answer you get should be $161.051000.

A Couple of Notes

  1. 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.
  2. The order in which the numbers are entered does not matter.
  3. 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.
  4. 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 $161.051000 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 $161.05100 (cash outflow) in five years.  Do not change the sign of a number using the "minus" key.  Instead, use the +/- key.
  5. 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 $259.374246.

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 $-6,417.657701.  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 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. To start, always clear the cash-flow registers of the calculator as described below to avoid problems.

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?

Conceptually, we could always solve this problem by finding the present value of each of these cash flows individually by discounting @ 12% back to T0 and then summing the results.  However, that is the long way.  Instead, we'll use the CF key (cash flow key which is located just to the right of the 2nd key).  All we need to do is enter the cash flows (and frequencies of those cash flows denoted as Fx) exactly as shown in the  preceding table of cash-flows.  Note, we must clear the cash flow registers first to avoid any problems by pressing 2nd, CE/C (which is in the extreme lower left-hand corner of the calculator buttons). Note, pressing 2nd FV will have no effect on the cash flow registers and the cash-flow registers need to be accessed in order to clear them. The calculator will prompt you to enter each cash flow and then the frequency (shown as F0) with which it occurs.  For now, just accept the default of 1 each time.  Now, press CF, then 0, Enter (which is beside the CPT key at the top left of the calculator), down arrow (which is to the left the on/off button at the top of the calculator), 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 of these cash-flows is $1,000.179223.  Note that you can easily change the interest rate by pressing the up arrow key to get back to that step.

Now suppose that we wanted to find the future value of these cash flows instead of the present value.  There is no key to do this so we need to use a little ingenuity.  Realize that one way to find the future value of any set of cash flows is to first find the present value.  Next, find the future value of that present value and you have your solution.  In this case, we've already determined that the present value is $1,000.179223.  Clear the financial keys (2nd FV) then enter 1000.179222 into the PV key.  N is 5 and I/Y is 12.  Now press CPT FV and you'll see that the future value is $1,762.65753.  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?  What is the 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 @ T0 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 T0 (i.e., today).  To find the NPV or IRR, first clear the cash flow registers (as described earlier) 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 $200.179223.  Solving for the IRR is done exactly the same way, except that the discount rate is not necessary.  This time, you'll press IRR (which is to the right of the NPV key), CPT and find that the IRR is 19.538198%. How is the calculator coming up with the IRR and what does it mean? Well, the calculator is using interpolation (guessing high then guessing low and meeting in the middle) to solve for the IRR by is setting the NPV to zero. This is a easy check figure for the NPV and its associated discount rate for the investment.

To learn more about the Texas Instruments BAII Plus including how to use the amortization function, download the PDF file called Texas Instruments BAII Plus Useful Keystrokes Summary. This will walk you through several more examples and provide a very concise detailing of keystrokes to accomplish common functions and I highly recommend it if you are new to this calculator.

If these tutorial are not enough, you may also get a tutorial at the BAII Plus Financial Calculator page from TI.