Additional Financial Functions; Discounted Cash Flow Analysis: Npv And Irr - HP 12c User Manual

Discounted Cash Flow Analysis: NPV and IRR

The hp 12c provides functions for the two most widely-used methods of discounted
cash flow analysis: l (net present value) and L (internal rate of return). These
functions enable you to analyze financial problems involving cash flows (money
paid out or received) occurring at regular intervals. As in compound interest
calculations, the interval between cash flows can be any time period; however, the
amounts of these cash flows need not be equal.
To understand how to use l and L, let's consider the cash flow diagram for
an investment that requires an initial cash outlay (CF
(CF ) at the end of the first year, and so on up to the final cash flow (CF
1
end of the sixth year. In the following diagram, the initial investment is denoted by
CF , and is depicted as an arrow pointing down from the time line since it is cash
0
paid out. Cash flows CF
represent projected cash flow losses.
NPV is calculated by adding the initial investment (represented as a negative cash
flow) to the present value of the anticipated future cash flows. The interest rate, i,
will be referred to in this discussion of NPV and IRR as the rate of return.
value of NPV indicates the result of the investment:
*
Other terms are sometimes used to refer to the rate of return. These include: required rate of
return, minimally acceptable rate of return, and cost of capital.
File name: hp 12c_user's guide_English_HDPMBF12E44
Printered Date: 2005/7/29
Section 4
Additional Financial
Functions
and CF also point down from the time line, because they
1 4
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) and generates a cash flow
0
) at the
6
The
*