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File name: hp 12c_user's guide_English_HDPMBF12E44 Page: 57 of 209
Printered Date: 2005/7/29 Dimension: 14.8 cm x 21 cm
Section 4
Additional Financial
Functions
Discounted Cash Flow Analysis: NPV and IRR
The hp 12c provides functions for the two most widely-used methods of discounted
cash flow analysis:
l
(net present value) and
L
(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
l
and
L
, let’s consider the cash flow diagram for
an investment that requires an initial cash outlay (CF
0
) and generates a cash flow
(CF
1
) at the end of the first year, and so on up to the final cash flow (CF
6
) at the
end of the sixth year. In the following diagram, the initial investment is denoted by
CF
0
, and is depicted as an arrow pointing down from the time line since it is cash
paid out. Cash flows CF
1
and CF
4
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.