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Using Time Value of Money

Using Time Value of Money

I got a good introduction to HP CALC's Time Value of Money (TVM) Application when I recently purchased a new car.

One dealer offered to lease me a car with a Capitalized Cost of $17,700, for nothing down and $224.26 per month for three years. At the end of three years, the car would have a "residual value" of $10,675, and I would be responsible for a processing fee of $325 if I decided to purchase the car at the residual value.

I started up HP CALC on my 100LX and pressed (MENU) Application TVM to get the TVM mode. (On the 95LX, start HP CALC and press (MENU) TVM.) I pressed (MENU) Clear Data (ENTER) to clear the previous TVM problem (on the 95LX press (MENU) Erase Data). I keyed in 36 and pressed (F6) (N) for the Number of periods. I then keyed in 17,700 and pressed (F8) (PV) for the Present Value (Capitalized COST) of the car. I keyed in -224.26 and pressed (F9) (PMT) for the Payment. I keyed in 12 and pressed (F5) (P/YR) for the number of Payments I would make per year. I then entered -10,675 and then pressed (F10) (FV) for the Final (Residual) value. (It took me quite a while to figure out that the residual value of the car needed to be a negative number. This aspect of the TVM application still confuses me, but it is the way it works.)

After all the data was entered, I pressed (F7) (I%/YR) to calculate the effective Interest per year I was being charged on the lease (2.44% per year). To see my total interest costs, I pressed (F2) (Amort), then pressed (F2) (Go) three times. I could now see that the accumulated interest was $1,048.35 over the three years. My total interest ($1,048.35) and processing fee ($325) costs for the lease would be $1,400.35.

Now 2.44% is a very good rate, but because the residual value of the loan is so high after three years, I am paying that interest on a rather large amount of money. I was interested to see what the rate and total interest would be for a "normal" loan in which the $17,700 was completely paid off during the three year period.

I still had 36 as N, 17,700 as PV and 12 as P/YR. I entered 0 and pressed (F10) (FV) to indicate that the final value of the car would be zero (i.e. it would be paid off). If I went the purchase/loan route, I was going to borrow against funds I had in our company savings plan. The effective interest rate of our savings plan can not be calculated accurately in advance, but I estimated it at 5%. I keyed in 5 and pressed (F7) (I%/YR), then pressed (F9) (PMT) to calculate the monthly payment. The result was $530.48. I then pressed (F2) (Amort) and pressed (F2) (Go) three times to calculate the total interest. The total interest was $1,397.63.

At this level the lease option ($1,400.35) and the purchase/loan options ($1,397.63) were about equal, but there was one other consideration. The manufacturer was offering a $1,000 discount to people who had previously owned this brand of automobile. This clearly made the purchase/loan route the preferable one for me.

Another manufacturer offered me the following terms. The Capitalized Cost was $24,000, and the dealer offered a three year lease with payments of $468/month and a residual value of $11,040 at the end of the lease. This works out to an effective rate of 7.23% and a total interest of $3,888.01 over the three year period. This manufacturer obviously was not as interested in selling me a car as the first manufacturer was, and he did not get my business.

iPhone Life magazine


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