TVM questions

CFA Level I
#1

I got this question and, I know how to solve it but I am confused as to the reasoning why?

An individual wants to be able to spend 80,000 per year for an anticipated 25 years in retirement. To fund this retirement account, he will make annual deposits of 6,608 at the end of each of his working years. He can earn 6% compounded annually on all investments. The minimum number of deposits that are needed to reach his retirement goal is closest too?

A) 40

B) 51

C) 28

Steps:

N= 25

I/Y= 6%

PMT= 80,000

FV= 0

SOLVE PV = 1,022,668.493

THEN SOLVE FOR N

I/Y =6%

PV = 0

PMT= -6608

FV= 1,022,668.493

SOLVE N = 40

My question is why the PMT of 6608 negative? Is this because PV, FV or PMT must be negative? If he is making annual deposits into his account wouldn’t this be a positive value?

Any help would be great!

Thanks!

#2

the simple answer is "because that’s how TI programmed it. If you are solving a simple problem with two dollar values in it (i.e. one “input” on and one “solution” one), the “Solution value” will be of opposite sign to the “input value”).

This is important in several cases

  • When solving for I/Y or N, you MUST have one negative dollar value and one positive one.
  • When solving Bond problems, you have THREE dollar values (PV, FV, and PMT). In this case, FV and PMT should be on one sign, and PV of the opposite sign.
#3

I figured that was the reasoning, thank you!

#4

These are cash flow buttons. You’re making deposits; that’s a cash outflow to you. Outflows are negative.

1 Like
#5

Thank you!

I was confused and thinking of it in the perspective of your account meaning if you add dollars to your account it is positive.

Thanks!!smiley

#6

If it helps, if you get an ERROR5 on your TI, that means you forgot to make something negative.