HP 10bII

NPV and IRR/YR: Discontinuing Cash Flows
Chapter 4 demonstrates the use of cash flow diagrams to clarify financial
problems. This section describes discounted cash flows. The NPV 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 thc present value of a series
of cash flows. The annual nominal interest rate must be known to
calculate NPV.
The internal rate of return (IRR/YR) function calculates the annual
nominal interest rate that is required to give a nct 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 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 14 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 onc $10,000 cash flow.
6: Cash Flow Calculations 77