HP 113394 User Guide - Page 72

Section 4 Additional Financial Functions Discounted Cash Flow Analysis: NPV and IRR The hp 12c platinum provides functions for the two most widely-used methods of discounted cash flow analysis: fl (net present value) and fL (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 fl and fL, let's consider the cash flow diagram for an investment that requires an initial cash outlay (CF0) and generates a cash flow (CF1) at the end of the first year, and so on up to the final cash flow (CF6) at the end of the sixth year. In the following diagram, the initial investment is denoted by CF0, and is depicted as an arrow pointing down from the time line since it is cash paid out. Cash flows CF1 and CF4 also point down from the time line, because they 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.* The 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. 72 File name: hp 12c pt_user's guide_English_HDPMF123E27 Page: 72 of 275 Printed Date: 2005/8/1 Dimension: 14.8 cm x 21 cm