Sharp EL733A EL-733A Operation Manual - Page 56

I2ndF1

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Notice that on cash-flow group four, which consisted of one cash-flow of 0, we left off the keystrokes El znd Ni . .You can always leave off the keystrokes W I2ndF1 ri . We included them in the previous groups consisting of just one cash-flow for clarity. But whenever you press without first pressing 2nd (1) , the EL-733A assumes that there is just one cash-flow in that group. After completing the above solution, you have described a cash-flow schedule with very irregular cash-flows to your calculator. Notice that in describing this cash-flow schedule, you have accounted for the beginning of the first period and the end of every period. You have not left off the periods that have cash-flows of zero. So, with the information that you have keyed in, the calculator can deduce exactly what happens at each period on the cash-flow schedule, from the beginning of the first period to the end of the last period. That cash-flow schedule is now stored in the memory of your EL-733A, and the EL-733A is ready to answer either one of these two very important questions about that schedule: 1. Given a periodic interest rate (stored in the i register), what is the value of all the cash-flows on that schedule if they are slid to the beginning of the first period (discounted according to the given interest rate) and netted together? In other words, given a periodic interest rate, what is the Net Present Value ( INPVJ ) of the cash-flows on that schedule? 2. What is the periodic interest rate that would make the Net Present Value equal to zero? This interest rate is called the Internal Rate of Return (or [RI ). 109 The answers to those two questions open up a literal wealth of information about the majority of financial problems with irregular cash-flows. The remainder of this chapter looks at how you can apply the answers to those two questions to the financial scenarios that you encounter. riP)VI: NET PRESENT VALUE To illustrate the use of the INPvJ function, let's look at an an example. This is similar to the discounted mortgage example on page 96, except that the payment schedule is not regular. Example: At a New Year's Eve party, you are approached by a lender who wishes to sell a contract. Though not anxious to discuss business during the festivities, you are intrigued by the potential good deal that you are being offered, so you take your EL-733A from your pocket to do some quick calculations. The payment schedule on the contract this lender is selling calls for a $61000 payment at the end of June and a $101100 payment at the end of each of the three months October, November, and December for the next three years. You have some cash in a mutual fund that has been getting about a 12% return, and you would like to boost that return to around 18%. What should you pay for the contract? Solution: This is a typical situation where you can make good use of the NPV function. You know (or can specify) the periodic interest rate, and you are interested in what the schedule is worth up front. 109

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Notice
that
on
cash
-flow
group
four,
which
consisted
of
one
cash
-flow
of
0,
we
left
off
the
keystrokes
El
znd
Ni
.
.You
can
always
leave
off
the
keystrokes
W
I2ndF1
ri
.
We
included
them
in
the
previous
groups
consisting
of
just
one
cash
-flow
for
clarity.
But
whenever
you
press
without
fi
rst
pressing
2nd
(1)
,
the
EL
-733A
assumes
that
there
is
just
one
cash
-flow
in
that
group.
After
completing
the
above
solution,
you
have
described
a
cash
-flow
schedule
with
very
irregular
cash
-flows
to
your
calculator.
Notice
that
in
describing
this
cash
-flow
schedule,
you
have
accounted
for
the
beginning
of
the
first
period
and
the
end
of
every
period.
You
have
not
left
off
the
periods
that
have
cash
-flows
of
zero.
So,
with
the
information
that
you
have
keyed
in,
the
calculator
can
deduce
exactly
what
happens
at
each
period
on
the
cash
-flow
schedule,
from
the
beginning
of
the
fi
rst
period
to
the
end
of
the
last
period.
That
cash
-flow
schedule
is
now
stored
in
the
memory
of
your
EL
-733A,
and
the
EL
-733A
is
ready
to
answer
either
one
of
these
two
very
important
questions
about
that
schedule:
1.
Given
a
periodic
interest
rate
(stored
in
the
i
register),
what
is
the
value
of
all
the
cash
-flows
on
that
schedule
if
they
are
slid
to
the
beginning
of
the
first
period
(discounted
according
to
the
given
interest
rate)
and
netted
together?
In
other
words,
given
a
periodic
interest
rate,
what
is
the
Net
Present
Value
(
INPVJ
)
of
the
cash
-flows
on
that
schedule?
2.
What
is
the
periodic
interest
rate
that
would
make
the
Net
Present
Value
equal
to
zero?
This
interest
rate
is
called
the
Internal
Rate
of
Return
(or
[RI
).
The
answers
to
those
two
questions
open
up
a
li
teral
wealth
of
information
about
the
majority
of
fi
nancial
problems
with
irregular
cash
-flows.
The
remainder
of
this
chapter
looks
at
how
you
can
apply
the
answers
to
those
two
questions
to
the
fi
nancial
scenarios
that
you
encounter.
riP)
VI:
NET
PRESENT
VALUE
To
illustrate
the
use
of
the
INPvJ
function,
let's
look
at
an an
example.
This
is
similar
to
the
discounted
mortgage
example
on
page
96,
except
that
the
payment
schedule
is
not
regular.
Example:
At
a
New
Year's
Eve
party,
you
are
approached
by
a
lender
who
wishes
to
sell
a
contract.
Though
not
anxious
to
discuss
business
during
the
festivities,
you
are
intrigued
by
the
potential
good
deal
that
you
are
being
offered,
so
you
take
your
EL
-733A
from
your
pocket
to
do
some
quick
calculations.
The
payment
schedule
on
the
contract
this
lender
is
selling
calls
for
a
$6
1
000
payment
at
the
end
of
June
and
a
$101100
payment
at
the
end
of
each
of
the
three
months
October,
November,
and
December
for
the
next
three
years.
You
have
some
cash
in
a
mutual
fund
that
has
been
getting
about
a
12%
return,
and
you
would
like
to
boost
that
return
to
around
18%.
What
should
you
pay
for
the
contract?
Solution:
This
is
a
typical
situation
where
you
can
make
good
use
of
the
NPV
function.
You
know
(or
can
specify)
the
periodic
interest
rate,
and
you
are
interested
in
what
the
schedule
is
worth
up
front.
109
109