User`s guide

Cash Flow Calculations
91
NPV and IRR/YR: Discounting Cash Flows
Chapter 5 titled, Picturing Financial Problems demonstrates the use of cash flow diagrams to
clarify financial problems. This section describes discounted cash flows. The NPV, NFV and
IRR/YR functions are frequently referred to as discounted cash flow functions.
When a cash flow is discounted, you calculate its present value. When multiple cash flows
are discounted, you calculate the present values and add them together.
The net present value (NPV) function finds the present value of a series of cash flows. The
annual nominal interest rate must be known to calculate NPV.
The net future value (NFV) function finds the value of the cash flows at the time of the last cash
flow, discounting the earlier cash flows by the value set for the annual nominal interest rate.
The internal rate of return (IRR/YR) function calculates the annual nominal interest rate that is
required to give a net present value of zero.
The utility of these two financial tools becomes clear after working a few examples. The
next two sections describe organizing and entering your cash flows. Examples of NPV,
NFV, and IRR/YR calculations follow.
Organizing Cash Flows
The cash flow series is organized into an initial cash flow (CF
0
) and succeeding cash flow
groups (up to 44 cash flows). CF
0
occurs at the beginning of the first period. A cash flow
group consists of a cash flow amount and the number of times it repeats.
For example, in the following cash flow diagram, the initial cash flow is -11,000. The next
group of cash flows consists of six flows of zero each, followed by a group of three 1,000
cash flows. The final group consists of one 10,000 cash flow.
Y:::y¤
-4,000.00
(CF 2 flashes, then
disappears)
Enters second cash flow. Note
the CFLO and CF annunciators.
JJjSV7Gd¤
11, 7 6 5 . 2 9
(CF 3 flashes, then
disappears)
Enters third cash flow. Note the
CFLO and CF annunciators.
\Á
38.98 Calculates annual nominal yield.
aJG
3.25 Monthly yield.
Table 8-2 Example 1: a short term investment
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