Section 4: Additional Financial Functions 59
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 attractive.
z If IRR is equal to the desired rate of return, the investor is indifferent
toward the investment.
z If IRR is less than the desired rate of return, the investment is not
financially attractive.
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 30 cash
flows (in addition to the initial investment CF
0
) 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 30 cash
flows, or you can minimize the number of storage registers required for
problems involving less than 30 cash flows, by using the procedure described
next (under Calculating NPV for Grouped Cash Flows, page 61).
The amount of the initial investment (CF
0
) is entered into the calculator using
the J key.
Each cash flow (CF
1
, CF
2
, etc.) is designated CF
j
, 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 the K key. Each time gK 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
0
) have been entered.
Note: When entering cash flow amounts – including the initial investment
CF
0
– remember to observe the cash flow sign convention by pressing
Þ after keying in a negative cash flow.
In summary, to enter the cash flow amounts:
1. Press fCLEARH to clear the financial and storage registers.
