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The V MODE button allows the pilot to select between three vertical navigation modes:

While in the ALT HLD (Altitude Hold) mode, rotating the encoder knob will make fine adjustments to the current altitude - approximately 5 feet per click.  This is useful to change altitude to agree with the primary aircraft altimeter after receiving a barometric update.

Pressing the V MODE button while in the ALT HLD mode will advance to the AS/VS (Airspeed/Vertical Speed) mode.  Rotating the encoder knob in this Mode will set in a climb or descent rate.  Pressing the encoder knob will activate the climb or descent.

Once a climb/descent rate has been selected, pressing the V MODE button again will advance to the ALT SEL (Altitude Select) mode.  Here the pilot can use the encoder knob to enter a target altitude.  Pressing the encoder knob will activate the selected altitude and the aircraft will begin to climb/descend to that altitude.  Once the selected altitude is reached, the autopilot will automatically switch to the ALT HLD mode and the aircraft will hold that altitude.

When a climb/descent rate is set using the encoder, the AS/VS LED is illuminated.  Once the encoder button is pressed, and the climb/descent begins, the AS/VS LED will flash to indicate that the change in altitude is underway (shown below). 

Similarly, when a vertical rate has been selected, and a target altitude has been set using the encoder, both the AS/VS LED and the ALT SEL LED will show a steady illumination.  When the encoder knob is pressed,  the climb/descent to the selected altitude is initiated and the LEDs will flash.  Once the target altitude is reached, the autopilot will level the aircraft and enter the Altitude Hold mode.  The two LEDs will no longer be illuminated and the ALT HLD LED will turn on (as shown).