HP 17B Tutorial

The HP 17B is a fairly easy to use financial calculator which will serve you well in all finance courses. The 17B can operate in either RPN (reverse polish notation) or algebraic modes.  RPN is better in most cases, so I suggest that you choose that mode if you understand RPN.  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, we will cover more difficult problems in class.  I will make no effort here to teach RPN.

Setup

Before we get started, we need to correctly configure the calculator.  The 17B 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 we need to navigate through the menus a bit.  First choose the FIN menu (use the up arrow keys below the screen to choose menu items). Next, choose TVM to get to the time value of money menu.  Next, choose OTHER.  Finally, enter 1 and then select P/YR and the calculator should show "1 P/YR      END MODE" on the screen.  If, for some reason, it says BEGIN MODE instead, press the menu labeled END.  Problem solved.  Press the Exit key to return to the TVM menu.

One other adjustment is important before we get started.  By default the 17B displays only two decimal places.  This is not enough.  Personally, I like to see four decimal places, but you may prefer some other number.  To change the display, press the DSP (display) key, choose FIX, and then enter the number of decimal places you wish to display.  I would press DSP, FIX, then 4 to display 4 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 17B:

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?

First, make sure that the FIN menu is on the screen (as in the picture).  

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 shift Input to clear the memory.  Now all we need to do is enter the numbers into the appropriate keys: 5 into N, 10 into I%YR, -100 into PV.  Now to find the future value simply press the FV key.  The answer you get should be 161.05.

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%YR, 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%YR 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 $161.05 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.
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 259.37.

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 shift Input to clear the financial keys.  Enter the numbers into the appropriate keys: 10 into N, 9 into I%YR, and 1000 (cash inflow) into PMT.  Now press 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 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 17B also has a menu to handle a series of uneven cash flows.  Press the Exit key to get back to the FIN menu, and then choose the CFLO (cash flow) menu.

Suppose that you are offered an investment which will pay the following cash flows at the end of each of the next five years:

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 menu.  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 shift then Input, and then choose YES when prompted.  The calculator will prompt you for the cash flows for each period, and the frequency of those cash flows.  For now, make sure each #TIMES prompt is set to 1 as you enter your cash flows.  All you need to do is to enter the cash flows from the above list when prompted.  Use the input key to enter the numbers.  Once all of the cash flows are entered, press the Exit key to get to another menu.  Choose CALC (calculate).  On the CALC menu, we first need to enter 12 in the I% key. Finally, press the NPV key to find that the present value is $1,000.17922.  Note that you can easily change the interest rate by simply re-entering it and then solving again for the NPV.

Now suppose that we wanted to find the future value of these cash flows instead of the present value.  On most calculators, there is no key to do this.  On the 17B, however, all we need to do is to press the NFV (net future value) key to see that the future value is $1,762.65754.  Pretty easy, huh?  Now press the Exit key twice and return to the CFLO menu for the next example.

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 FLOW (0), then enter the remaining cash flows exactly as before.  When the cash flows are entered, press Exit and go to the CFLO menu, then enter 12 into I% and then press NPV.  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 the IRR key to find that the IRR is 19.5382%.

Note: There was no need to actually re-enter all of those cash flows.  Instead, when you returned to the CFLO menu it was prompting you to enter cash flow 6.  If you had used the up arrow key (two keys above the shift key, not one of the menu keys), you could have scrolled back to cash flow 0 and entered -800.  You would proceed from there exactly as before.