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Student Question of the Week: Correctly Entering a Positive or Negative Cash Flow

Student Question from: Jessica W.
Course:  Fundamentals – Calculator

Student Question:

I am getting confused on when the PV should be entered as a negative or positive number for these calculator problems. If I enter it the wrong way (negative when needs to be positive) I am getting the incorrect answer. Thanks!

Instructor Response:

This is a common question.  So, the easiest way for me personally to think about it is whether cash is coming in or going out.  And you can even think about it from the perspective of coming in or going out of your checking account.  Look at the example on this page, which I’ve copied below…

Example:  Clyde has applied for a fixed-rate mortgage of $220,000 for 30 years at 7%. What is his monthly payment?

Here, Clyde will be having money come IN to his checking account, in theory.  Obviously, the money is not actually going into his checking account, but think of it as the bank gives him money to then purchase the house.  Therefore, money is coming IN, which means $220,000 is a positive PV entry.  Then you do 30 g n, and 7 g i, and you get an answer of negative $1,463,67.  That’s because every month, he must pay (cash going OUT) his mortgage of $1,463.67.

Just think of it from the perceptive of what direction cash is going.  Another example would be buying a stock.  Buy a stock today for $10 and sell it 5 years from now for $35.  The $10 would be the negative entry because cash is going OUT to purchase the stock.  The sell price of $35 would be the positive entry because you have $35 cash coming IN as proceeds from the sale.

Hope that helps!