TVET PROGRAM TITLE: Accounts and Budget Support Level –III

MODULE TITLE: Performing Financial Calculations

LEARNING OUTCOMES:

At the end of this module the trainer will be able to

LO1: Obtain data and resources for financial calculations

LO2: Select appropriate methods and carry out financial calculations

LO3: Check calculations and record outcomes

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Contents
LO1: Obtain data and resources for financial calculations ............................................................. 3
Financial Calculators ................................................................................................................... 3
How to Work a Financial Calculator........................................................................................... 5
Method 1 of 2: Hand-Held Financial Calculators ................................................................... 5
Method 2 of 2: Online Financial Calculators .......................................................................... 8
LO2: Select appropriate methods and carry out financial calculations ....................................... 10
Methods to carry out financial calculations .............................................................................. 10
1) Adjusted Balance............................................................................................................ 10
2) Average Daily Balance................................................................................................... 10
3) Daily Balance ................................................................................................................. 10
4) Double Billing Cycle ...................................................................................................... 11
5) Ending Balance .............................................................................................................. 11
6) Previous Balance ............................................................................................................ 11
How to Calculate Financial Ratios of Performance .................................................................. 11
Current Ratio ............................................................................................................................. 11
Quick Ratio ............................................................................................................................... 12
Return on Assets........................................................................................................................ 12
Asset Turnover .......................................................................................................................... 12
Return on Equity ....................................................................................................................... 12
LO3: Check calculations and record outcomes ........................................................................... 13
Understanding the Time Value of Money ................................................................................. 13
What is Time Value? ............................................................................................................. 13
Present Value Basics ............................................................................................................. 15
Present Value of a Future Payment ....................................................................................... 17

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LO1: Obtain data and resources for financial
calculations
Financial Calculators
This finance calculator can be used to calculate any one of the parameters of future value (FV),
number of compounding periods (N), interest rate (I/Y), annuity payment (PMT), and starting
investment if other parameters are known. The present value will always be given out. Each of
the following tabs represents the parameters to be calculated.

The finance section of The Calculator Site featuring useful financial calculator tools for loans,
car/auto loans, compound interest, savings, mortgages and more.

COMPOUND INTEREST CALCULATOR

Use these financial calculators to work out the compound interest on your savings. The first
calculator works out interest on a lump sum. The second calculator allows you to include regular
monthly deposits. Interest can be compounded on a monthly or yearly basis.

CAR LOAN CALCULATOR

Are you looking to purchase a new car on credit? Use this car loan calculator to work out
monthly repayment figures for a car loan. The calculator results include a monthly breakdown
schedule of interest and capital repayment amounts, to show you exactly what you will be
paying.

CREDIT CARD CALCULATORS

Use these credit card repayment calculators to work out effective strategies for paying off your
credit card debt. There are two calculators available, depending on which type of calculation you
would like to do.

CURRENCY CONVERTER

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A handy universal currency converter that allows you to quickly convert between more than 250
different world currencies.

INTEREST RATE CALCULATOR

If you're want to work out what interest rate you're currently receiving on your loan, whether it's
a secured, unsecured or payday loan, use our interest rate calculator to do the calculation for you.

LOAN CALCULATOR

Calculate your monthly repayment figures for a secured or unsecured loan using this finance
calculator tool. The calculator results include a monthly breakdown schedule of interest and
capital repayment amounts, to show you exactly what you will be paying.

MORTGAGE REFINANCE CALCULATOR

If you are looking at the option of refinancing your existing mortgage, whether it be to lower
your monthly payments or overall costs, use our mortgage refinance calculator. Simply enter the
information for your existing mortgage and the interest rate at which you are considering
refinancing and let the calculator do all the work for you.

MORTGAGE REPAYMENT CALCULATOR

If you are considering the idea of taking out a new mortgage loan, or are looking for mortgage
refinancing, this finance calculator should prove useful. Once you enter the figures for the
mortgage, it will provide you with a breakdown of interest and capital repayments over the life
of the mortgage.

RETIREMENT PLANNING CALCULATOR

Calculate how much you might need to save per year in order to meet your retirement goals
using this retirement planner. The calculator also adjusts for inflation.

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 SAVINGS CALCULATORS

Two savings calculators to help you to work out the interest paid on your savings amount. The
first finance calculator is for regular savings on an initial deposit amount. The second calculator
allows an option to include a regular monthly savings deposit amount.

SAVINGS GOAL CALCULATORS

If you want to find out how much to save each month or how long to commit to saving to
achieve a financial goal, these two calculators are the ones to choose. Simply enter a few key
figures and let the calculators do the rest.

How to Work a Financial Calculator

A financial calculator can be an indispensable tool in helping you coordinate your personal
finances. Most hand-held calculators can perform more than 100 common financial
computations. Online versions are abundant, easy to use, and cover a complete range of
calculations, including mortgage rates, deferred annuities, loan payments and retirement
planning. Follow these guidelines if you want to know how to work a financial calculator.

Method 1 of 2: Hand-Held Financial Calculators

1 Identify the proper function keys on the calculator. You will often need to execute advanced

applications on hand-held financial calculators using the 2 shift keys.

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  F shift key: This activates the gold alternate functions that appear over the standard-
function keys. Some of the important f keys include AMORT (amortization) and NPV
(net present value).
 G shift key: These keys activate the blue alternate function keys that appear slanted on
the standard keys. Some of the important g keys are 12x, which you use to adjust an
annual interest rate, and END, which you would use for payments set to end at a specific
period.

2 Input programs into the calculator If you use certain formulas often, you can store
them in the calculator by selecting the f shift key and then pressing P/R. Most hand-held
calculators will allow you to save several programs.

3 Determine the financial calculation you want to perform. Top hand-held financial
calculators can perform basic mathematical equations or complex financial computations, like
partial-year depreciation and full investment analysis. For example, to find the percentage your
stock lost when it fell from $61.25 per share to $57.50, you would in follow these steps:

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  Type in 61.25 and hit ENTER. ENTER separates the base number from the
second number.

 Type in 57.5.

 Press the percentage key.

 The calculation renders a 6.122 percent loss.

4 Consult the calculator's user guide for instructions on specific calculations.For example,
the basic keystrokes you would use to calculate simple interest on a $500 loan for 120 days with
a 5 percent interest rate are:

 Type in 120n, where n stores the value for the term of the loan.

 Type in 5i, where i stores the value for the interest rate, which in this example is 5
percent.

 Enter 500 CHS PV, which stores the principle.

 Press f INT to calculate the accrued interest. In this example, it is $8.33.

 Press + to calculate the total amount owed (principle plus accrued interest). The
total is $508.33.

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 5 Input data properly. Regardless of the complexity of the equation, you must enter data in the
correct sequence to render accurate results. Be aware that calculator set-ups can vary slightly
from 1 model to the next.

Method 2 of 2: Online Financial Calculators

1.

1 Choose a calculator that meets your specific needs. Online calculators are plentiful and
generally simpler to use than portable devices. There are online calculators that cover virtually
all financial applications, including:

 Mortgage: loan payments, APRs, and amortization schedules

 Retirement: IRA conversions, Social Security benefits, and pension payouts
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  Personal finance: costs of child rearing, budgeting, or saving for a child's college
education
 Insurance: term insurance and annuities

2 Enter the values as indicated on the calculator form.

3 Hit the calculate button to generate the result.

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LO2. Select appropriate methods and carry
out financial calculations
Methods to carry out financial calculations
Finance charges are applied to credit card balances that aren't paid before the grace period.
Different credit cards calculate finance charges in different ways. To find out how your creditor
calculates your charge, look on the back of a recent billing statement. You should find an
explanation there.

Below are six ways finance charges can be calculated. Click on the links for a more detailed
explanation including example of how the charge works.

1) Adjusted Balance

The adjusted balance method uses the balance at the beginning of the billing cycle and subtracts
any payments you made. Purchases are not included in the balance. This is the least expensive
method of calculating finance charges.

2) Average Daily Balance

The average daily balance method uses the average of your balance during the billing cycle.
Each day's balance is added together and divided by the number of days in the billing cycle This
is the most common way finance charges are calculated.

How it's calculated: The Company averages your daily balance. For instance, if you charged
$100 on the first day of June and charged an additional $200 on the 16th, your average daily
balance would be $200. That number times roughly one-twelfth your annual percentage rate, or
APR, equals your monthly finance charge. Interest may be calculated on a daily or monthly
basis.

3) Daily Balance

The daily balance method uses the balance each day of your billing cycle. Each day's balance is
multiplied by the daily rate and added together.

How it's calculated: The Company calculates the actual balance you carried each day of your
billing cycle and multiplies it by roughly 1/365th of your APR and adds it together.

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 4) Double Billing Cycle

The double billing cycle uses the average daily balance of the current and previous billing cycles.
This is the most expensive way finance charges are calculated. Fortunately for credit
cardholders, the double billing cycle method of calculating finance charges is now against the
law.

How it's calculated: A credit card practice where the consumer is charged interest on debt
already paid. Here's how it works: A cardholder begins a billing cycle with a zero blance and
charges $500 on a credit card. They make an on-time payment of $450. With double-cycle
billing, they would be charged interest on the $500 -- instead of the $50 still owed -- in the next
billing cycle.

5) Ending Balance

The ending balance method uses your beginning balance minus payments plus charges made
during the billing cycle. The number of days in the billing cycle doesn't affect the amount of the
finance charge.

6) Previous Balance

The previous balance method uses the balance at the beginning of the billing cycle which is also
the ending balance of the last billing cycle. No payments or charges are included. The number of
days in the billing cycle doesn't affect the amount of the finance charge.

How it's calculated: The bill will show beginning balance and ending balance for your
account. The finance charge is based on the outstanding balance at the beginning of the billing
cycle

How to Calculate Financial Ratios of Performance

Financial ratios allow you to break down your company's financial statements and see how it is
performing from different angles. Whether you are creating a proposal for new investors, seeking
bank financing or want compare your company to another, financial ratios provide a way to
simplify a lot of financial information quickly. There are many performance related ratios, but
several are commonly analyzed and discussed among business owners and potential investors.

Current Ratio

Use the current ratio to assess your company's ability to meet its financial obligations. Calculate
the ratio by dividing the current assets by the current liabilities; both these figures are from the
balance sheet. Assets and liabilities are "current" if they are receivable or payable within one

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year. A current ratio of two or higher shows your current assets can likely cover current
liabilities as they come due.

Quick Ratio

The quick ratio excludes any shares your company may have issued from the current assets,
providing a more stringent view of your company's ability to meet short-term financial
obligations. Calculate the quick ratio by subtracting the value of outstanding shares from current
assets, and dividing the result by current liabilities. To get the value of outstanding shares,
multiply the number of shares outstanding by the share price. If you are unsure of the share price,
instead deduct inventories from the current assets to create an alternative measure of the quick
ratio. A ratio of one or higher is considered financially healthy.

Return on Assets

Use ROA to determine how much profit is being generated for each dollar your company has in
assets. Divide the net profit by net assets, and multiply by 100 to compute the ROA. Find net
profit on the income statement, and use the balance sheet to compute net assets by taking total
assets minus total liabilities. The higher the ratio, the more efficiently your company is
generating profits from its resources. New businesses take time to produce profits and utilize
assets; therefore the trend in the figure year-over-year is often considered more important than a
single calculation.

Asset Turnover

Asset turnover, or sales-to-asset ratio, shows how efficiently your company is converting its
assets into sales. Find your company's sales on the income statement and divide it by total assets
from the balance sheet. The higher the ratio the better; a reading of one or higher indicates the
company is generating more than $1 in sales for each $1 in assets. New start-ups may take time
to generate significant sales, therefore track the quarterly or yearly trend of the figure. A rising
asset turnover ratio over time shows assets are being utilized more effectively.

Return on Equity

ROE tells you how well your company is using shareholder's equity -- potentially your own
equity -- to generate profits. Take net income from the income statement and divide it by the
shareholder's equity from the balance sheet to attain ROE. The ratio is tracked over time --
computing the figure quarterly or yearly -- to see if return on equity is increasing or decreasing.
An increasing ROE is preferable as it shows the company is more efficiently using shareholder's
equity to produce profits. Business owners typically want to maximize ROE to sustain or attract
investors.

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LO3: Check calculations and record
outcomes
Understanding the Time Value of Money
What is Time Value?
If you're like most people, you would choose to receive the $10,000 now. After all, three
years is a long time to wait. Why would any rational person defer payment into the future
when he or she could have the same amount of money now? For most of us, taking the
money in the present is just plain instinctive. So at the most basic level, the time value of
money demonstrates that, all things being equal, it is better to have money now rather
than later.

But why is this? A $100 bill has the same value as a $100 bill one year from now, doesn't
it? Actually, although the bill is the same, you can do much more with the money if you
have it now because over time you can earn more interest on your money.

Back to our example: by receiving $10,000 today, you are poised to increase the future
value of your money by investing and gaining interest over a period of time. For Option
B, you don't have time on your side, and the payment received in three years would be
your future value. To illustrate, we have provided a timeline:

If you are choosing Option A, your future value will be $10,000 plus any interest
acquired over the three years. The future value for Option B, on the other hand, would
only be $10,000. So how can you calculate exactly how much more Option A is worth,
compared to Option B? Let's take a look.
Future Value Basics
If you choose Option A and invest the total amount at a simple annual rate of 4.5%, the
future value of your investment at the end of the first year is $10,450, which of course is

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calculated by multiplying the principal amount of $10,000 by the interest rate of 4.5%
and then adding the interest gained to the principal amount:

Future value of investment at end of first

year:
= ($10,000 x 0.045) + $10,000
= $10,450
You can also calculate the total amount of a one-year investment with a simple
manipulation of the above equation:

 Original equation: ($10,000 x 0.045) + $10,000 = $10,450

 Manipulation: $10,000 x [(1 x 0.045) + 1] = $10,450
 Final equation: $10,000 x (0.045 + 1) = $10,450

The manipulated equation above is simply a removal of the like-variable $10,000 (the
principal amount) by dividing the entire original equation by $10,000.

If the $10,450 left in your investment account at the end of the first year is left untouched
and you invested it at 4.5% for another year, how much would you have? To calculate
this, you would take the $10,450 and multiply it again by 1.045 (0.045 +1). At the end of
two years, you would have $10,920:

Future value of investment at end of second year:

= $10,450 x (1+0.045)
= $10,920.25
The above calculation, then, is equivalent to the following equation:

Future Value = $10,000 x (1+0.045) x

(1+0.045)
Think back to math class and the rule of exponents, which states that the multiplication of
like terms is equivalent to adding their exponents. In the above equation, the two like
terms are (1+0.045), and the exponent on each is equal to 1. Therefore, the equation can
be represented as the following:

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We can see that the exponent is equal to the number of years for which the money is
earning interest in an investment. So, the equation for calculating the three-year future
value of the investment would look like this:

This calculation shows us that we don't need to calculate the future value after the first
year, then the second year, then the third year, and so on. If you know how many years
you would like to hold a present amount of money in an investment, the future value of
that amount is calculated by the following equation:

Present Value Basics

If you received $10,000 today, the present value would of course be $10,000 because
present value is what your investment gives you now if you were to spend it today. If
$10,000 were to be received in a year, the present value of the amount would not be
$10,000 because you do not have it in your hand now, in the present. To find the present
value of the $10,000 you will receive in the future, you need to pretend that the $10,000
is the total future value of an amount that you invested today. In other words, to find the
present value of the future $10,000, we need to find out how much we would have to
invest today in order to receive that $10,000 in the future.

To calculate present value, or the amount that we would have to invest today, you must
subtract the (hypothetical) accumulated interest from the $10,000. To achieve this, we
can discount the future payment amount ($10,000) by the interest rate for the period. In
essence, all you are doing is rearranging the future value equation above so that you may
solve for P. The above future value equation can be rewritten by replacing the P variable
with present value (PV) and manipulated as follows:

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Let's walk backwards from the $10,000 offered in Option B. Remember, the $10,000 to
be received in three years is really the same as the future value of an investment. If today
we were at the two-year mark, we would discount the payment back one year. At the two-
year mark, the present value of the $10,000 to be received in one year is represented as
the following:

Present value of future payment of $10,000 at end of

year two:

Note that if today we were at the one-year mark, the above $9,569.38 would be
considered the future value of our investment one year from now.

Continuing on, at the end of the first year we would be expecting to receive the payment
of $10,000 in two years. At an interest rate of 4.5%, the calculation for the present value
of a $10,000 payment expected in two years would be the following:

Present value of $10,000 in one year:

Of course, because of the rule of exponents, we don't have to calculate the future value of
the investment every year counting back from the $10,000 investment at the third year.
We could put the equation more concisely and use the $10,000 as FV. So, here is how
you can calculate today's present value of the $10,000 expected from a three-year
investment earning 4.5%:

So the present value of a future payment of $10,000 is worth $8,762.97 today if interest
rates are 4.5% per year. In other words, choosing Option B is like taking $8,762.97 now
and then investing it for three years. The equations above illustrate that Option A is better
not only because it offers you money right now but because it offers you $1,237.03
($10,000 - $8,762.97) more in cash! Furthermore, if you invest the $10,000 that you
receive from Option A, your choice gives you a future value that is $1,411.66
($11,411.66 - $10,000) greater than the future value of Option B.
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Present Value of a Future Payment
lets add a little spice to our investment knowledge. What if the payment in three years is
more than the amount you'd receive today? Say you could receive either $15,000 today or
$18,000 in four years. Which would you choose? The decision is now more difficult. If
you choose to receive $15,000 today and invest the entire amount, you may actually end
up with an amount of cash in four years that is less than $18,000. You could find the
future value of $15,000, but since we are always living in the present, let's find the
present value of $18,000 if interest rates are currently 4%. Remember that the equation
for present value is the following:

In the equation above, all we are doing is discounting the future value of an investment.
Using the numbers above, the present value of an $18,000 payment in four years would
be calculated as the following:

Present Value

From the above calculation we now know our choice is between receiving $15,000 or
$15,386.48 today. Of course we should choose to postpone payment for four years!
The Bottom Line
these calculations demonstrate that time literally is money - the value of the money you
have now is not the same as it will be in the future and vice versa. So, it is important to
know how to calculate the time value of money so that you can distinguish between the
worth of investments that offer you returns at different times.

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