Section 4: Additional Financial Functions 73
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z If NPV is positive, the financial value of the investor’s assets would be
increased: the investment is financially attractive.
z If NPV is zero, the financial value of the investor’s assets would not change:
the investor is indifferent toward the investment.
z If NPV is negative, the financial value of the investor’s assets would be
decreased: the investment is not financially attractive.
A comparison of the NPV’s of alternative investment possibilities indicates which of
them is most desirable: the greater the NPV, the greater the increase in the
financial value of the investor’s assets.
IRR is the rate of return at which the discounted future cash flows equal the initial
cash outlay: IRR is the discount rate at which NPV is zero. The value of IRR relative
to the present value discount rate also indicates the result of the investment:
z If IRR is greater than the desired rate of return, the investment is financially
z If IRR is equal to the desired rate of return, the investor is indifferent toward
z If IRR is less than the desired rate of return, the investment is not financially
Calculating Net Present Value (NPV)
Calculating NPV for Ungrouped Cash Flows.
If there are no equal
consecutive cash flows, use the procedure described (and then summarized) below.
With this procedure, NPV (and IRR) problems involving up to 80 cash flows (in
addition to the initial investment CF
) can be solved. If two or more consecutive
cash flows are equal — for example, if the cash flows in periods three and four
are both $8,500 — you can solve problems involving more than 80 cash flows, or
you can minimize the number of storage registers required for problems involving
less than 80 cash flows, by using the procedure described next (under Calculating
NPV for Grouped Cash Flows, page 75).
The amount of the initial investment (CF
) is entered into the calculator using the
Each cash flow (CF
, etc.) is designated CF
, where j takes on values from 1
up to the number of the final cash flow. The amount of a cash flow is entered using
keys. Each time
is pressed, the amount in the display is stored
in the next available storage register, and the number in the n register is increased
by 1. This register therefore counts how many cash flow amounts (in addition to
the initial investment CF
) have been entered.
Note: When entering cash flow amounts — including the initial investment
— remember to observe the cash flow sign convention by pressing Þ
after keying in a negative cash flow.