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20050401
7-4 Cash Flow (Investment Appraisal)
This calculator uses the discounted cash flow (DCF) method to perform investment appraisal
by totalling cash flow for a fixed period. This calculator can perform the following four types
of investment appraisal.
•Net present value (
NPV)
•Net future value (NFV)
• Internal rate of return (
IRR)
•Payback period* (PBP)
* The payback period (
PBP) can also be called the “discounted payback period” (DPP).
When the annual interest rate (
I%) is zero, the PBP is called the “simple payback period”
(SPP).
A cash flow diagram like the one shown below helps to visualize the movement of funds.
CF
0
CF
1
CF
2
CF
3
CF
4
CF
5
CF
6
CF
7
With this graph, the initial investment amount is represented by CF0. The cash flow one year
later is shown by
CF1, two years later by CF2, and so on.
Investment appraisal can be used to clearly determine whether an investment is realizing
profits that were originally targeted.
u NPV
NPV = CF0 + + + + … +
(1+ i)
CF
1
(1+ i)
2
CF2
(1+ i)
3
CF3
(1+ i)
n
CFn
i =
100
I %
n: natural number up to 254
u NFV
NFV = NPV × (1 + i )
n
u IRR
0 = CF
0
+ + + + … +
(1+ i)
CF
1
(1+ i)
2
CF
2
(1+ i)
3
CF
3
(1+ i)
n
CF
n
In this formula, NPV = 0, and the value of IRR is equivalent to i × 100. It should be noted,
however, that minute fractional values tend to accumulate during the subsequent
calculations performed automatically by the calculator, so
NPV never actually reaches
exactly zero.
IRR becomes more accurate the closer that NPV approaches to zero.
7-4-1
Cash Flow (Investment Appraisal)
20050601