Principles of Managerial Finance

CHAPTER 4 Time Value of Money 153

Hint Anyone familiar with
electronic spreadsheets, such as
Lotus or Excel, realizes that
most of the time-value-of-
money calculations can be done
expeditiously by using the
special functions contained in
the spreadsheet.

tice, you can increase both the speed and the accuracy of your financial computa-

tions. Note that because of a calculator’s greater precision, slight differences are

likely to exist between values calculated by using financial tables and those found

with a financial calculator. Remember thatconceptual understanding of the

material is the objective.An ability to solve problems with the aid of a calculator

does not necessarily reflect such an understanding, so don’t just settle for answers.

Work with the material until you are sure you also understand the concepts.

Computers and Spreadsheets

Like financial calculators, computers and spreadsheets have built-in routines that

simplify time value calculations. We provide in the text a number of spreadsheet

solutions that identify the cell entries for calculating time values. The value for

each variable is entered in a cell in the spreadsheet, and the calculation is pro-

grammed using an equation that links the individual cells. If values of the vari-

ables are changed, the solution automatically changes as a result of the equation

linking the cells. In the spreadsheet solutions in this book, the equation that

determines the calculation is shown at the bottom of the spreadsheet.

It is important that you become familiar with the use of spreadsheets for sev-

eral reasons.

• Spreadsheets go far beyond the computational abilities of calculators. They
  offer a host of routines for important financial and statistical relationships.
  They perform complex analyses, for example, that evaluate the probabilities
  of success and the risks of failure for management decisions.


• Spreadsheets have the ability to program logical decisions. They make it pos-
  sible to automate the choice of the best option from among two or more
  alternatives. We give several examples of this ability to identify the optimal
  selection among alternative investments and to decide what level of credit to
  extend to customers.


• Spreadsheets display not only the calculated values of solutions but also the
  input conditions on which solutions are based. The linkage between a
  spreadsheet’s cells makes it possible to do sensitivity analysis—that is, to
  evaluate the impacts of changes in conditions on the values of the solutions.
  Managers, after all, are seldom interested simply in determining a single
  value for a given set of conditions. Conditions change, and managers who are
  not prepared to react quickly to take advantage of changes must suffer their
  consequences.


• Spreadsheets encourage teamwork. They assemble details from different cor-
  porate divisions and consolidate them into a firm’s financial statements and
  cash budgets. They integrate information from marketing, manufacturing,
  and other functional organizations to evaluate capital investments. Laptop
  computers provide the portability to transport these abilities and use spread-
  sheets wherever one might be—attending an important meeting at a firm’s
  headquarters or visiting a distant customer or supplier.


• Spreadsheets enhance learning. Creating spreadsheets promotes one’s under-
  standing of a subject. Because spreadsheets are interactive, one gets an