Table 8-2 Example 1: a short term investment

KeysDisplay Description

Y:::y¤

-4,000.00

Enters second cash flow. Note

 

 

(CF 2 flashes, then

the CFLO and CF annunciators.

 

disappears)

 

 

 

 

JJjSV7Gd¤

11,765.29

Enters third cash flow. Note the

 

(CF 3 flashes, then

CFLO and CF annunciators.

 

disappears)

 

\Á

aJG

38.98Calculates annual nominal yield.

3.25Monthly yield.

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 (CF0) and succeeding cash flow groups (up to 44 cash flows). CF0 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.

Cash Flow Calculations 91