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Finance Calculator -Texas Instruments BA II +

NPV and IRR Calculations Guidance
3 KEYS:
CF: used to enter even or uneven cash flows. The up and down arrows move between
sequential CF and Frequency entries. The location of the CF key is on the second row
second column of the calculator.
NPV: The NPV key is used to compute the net present value of a stream of cash flows.
After the stream has been inputted, an interest rate must be entered to discount the
cash flow. Once all the factors are present, the NPV can be computed. The location of
the NPV key is on the second row third column of the calculator.
IRR: The IRR button is used to compute the internal rate of return. This being the rate at
which the NPV equals zero. The location of the IRR key is on the second row fourth
column of the calculator.
Finding the NPV and the IRR of a stream of uneven cash flows.

Example:
Investment = $400
Cash Inflow:
Year 1 =$100
Year 2= $200
Year 3 =$200
Year 4 =$300
Required rate of return =10%

NPV calculation

Beginning with a cash outflow (investment) of $400, a project will result in 4 inflows of unequal
amounts, spaced evenly, of 100, 200, 200, and 300 dollars.
CF, 2nd CLR Work,
CF0 = 400+/-, ENTER, down arrow
CO1 = 100, ENTER, down arrow
FO1 = 1 (default), ENTER, down arrow
CO2 = 200, ENTER, down arrow
FO2 = 2, sets frequency of cash flow #2 at 2, (two years of $200 each) ENTER, down arrow
CO3 = 300, ENTER
Press the NPV button and enter 10 for the rate the CFs will be discounted at (I=10).
Press ENTER and down arrow and then compute (CPT).
The screen should display NPV = 211.365.

IRR calculation
Press the IRR key and the calculator will compute displaying a figure of IRR = 28.9. At a
discount rate of 28.9% the net present value of the cash flows will equal 0.
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Option 2 (if no information about i- rate)

CF, 2nd CLR Work,
CF0 = 400+/-, ENTER, down arrow
CO1 = 100, ENTER, down arrow
FO1 = 1 (default), ENTER, down arrow
CO2 = 200, ENTER, down arrow
FO2 = 2, sets frequency of cash flow #2 at 2, (two years of $200 each) ENTER, down arrow
CO3 = 300, ENTER
IRR and then compute (CPT)
IRR = 28.9.

Steps to calculate NPV for project (No Income Tax impact)

1. Net Initial investment

the cash purchase price
any investment in working capital required
minus disposal price of old equipment a cash inflow
2. Recurring operating cash flows that differ between alternatives
Additional Revenue minus costs
Or additional savings in cost
3. Proceeds of disposal at end of project
Disposal of equipment
Any recovery of working capital

Example of NPV calculation (NO Income Tax impact)

Step 1 Net initial investment

Initial equipment investment $(5,000,000)

Initial working-capital investment (45,000)

Net initial investment $(5,045,000)

Step 2 Cash flow from operations

Annual after-tax cash flow from operations

Cash revenues $3,750,000
Material cash costs (1,700,000)
1
Direct labour cash costs $3,600,000 (900,000)
4
Increase in cash overhead costs (390,000)
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Annual cash flow from operations with new equipment (760,000)

Step 3 Cash flow from terminal disposal of investment
Cash flow from terminal disposal of machine $400,000
Cash flow from terminal disposal of working capital 45,000
After-tax cash flow from terminal disposal of investment $445,000

Summary

From Step 1 Net initial investment $(5,045,000)

Cash Flows
From Step 2 Year 1-9 $760,000
From Step 2+Step 3 Year 10 $760,000+$445,000=$1,205,000
NPV ($607,552.408)

CF, 2nd CLR Work,

CF0 = 5,045,000+/-, ENTER, down arrow
CO1 = 760,000, ENTER, down arrow
FO1 = 9, ENTER, down arrow (sets frequency of cash flow at 9, (9 years of $760,000 each year)
CO2 = 1,205,000, ENTER, down arrow
FO2 = 1, sets frequency of cash flow ENTER, down arrow

Press the NPV button and enter 12 for the rate the CFs will be discounted at (I=12).
Press ENTER and down arrow and then compute (CPT).
The screen should display NPV = -607,552.408.
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NPV calculation with impact of income taxes

Steps to calculate NPV for project including tax impact

1. Net Initial investment

a. the cash purchase price
b. any investment in working capital required
c. minus disposal price of old equipment a cash inflow
d. PV Tax shield from CCA
2. Recurring operating cash flows that differ between alternatives
a. Additional Revenue minus costs (after tax = Cash flow *(1-Tax rate))
b. Or additional savings in cost (after tax = Cash flow *(1-Tax rate))
3. Proceeds of disposal at end of project
a. Disposal of equipment
b. Any recovery of working capital
c. Less PV tax shield lost from terminal value

Relevant Cash Flows

Initial machine investment $(88,000)
Recurring after-tax operating savings* 21,600
PV Tax shield from CCA** 20,821
Proceeds from disposal of machine 8,000
Tax shield lost from terminal value*** (2,000)

*36,000 (1 0.4) = $21,600

**($88,000 0.4) (0.20/(0.20 + 0.12)) ((2 + 0.12)/(2(1 + 0.12))) = $20,821
***($8,000 0.4) (0.20/ (0.20 + 0.12)) = $2,000
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Formula to calculate Present value of Tax shield from CCA for Initial Investment

Investment=(Initial Investment minus disposable value of old equipment)

=$88,000-$0=$88,000
Marginal Tax rate(provided)=40% or 0.4
CCA rate (provided) =20% or 0.2
Required rate of return or cost of capital (provided)= 12% or 0.12

$20,821= ($88,000 0.4) (0.20/(0.20 + 0.12)) ((2 + 0.12)/(2(1 + 0.12)))

Formula to calculate Present value of Tax shield lost from CCA for disposal of investment
at end of project
Investment=-( Proceeds from disposal of machine ) = -$8,000
Marginal Tax rate(provided)=40% or 0.4
CCA rate (provided) =20% or 0.2
Required rate of return or cost of capital (provided)= 12% or 0.12

- 2,000= ($8,000 0.4) (0.20/ (0.20 + 0.12))

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From Step 1 (Year 0) Net initial investment $(67,179)

Cash Flows
From Step 2 Year 1-3 $21,600
From Step 2+Step 3 Year 4 $27,600
NPV 2,241

CF, 2nd CLR Work,

CF0 = 67,179+/-, ENTER, down arrow
CO1 = 21,600, ENTER, down arrow
FO1 = 3, ENTER, down arrow (sets frequency of cash flow at 3, (9 years of $21,600 each year)
CO2 = 27,600, ENTER, down arrow
FO2 = 1, sets frequency of cash flow ENTER, down arrow

Press the NPV button and enter 12 for the rate the CFs will be discounted at (I=12).
Press ENTER and down arrow and then compute (CPT).
The screen should display NPV = 2,241.

IRR calculation
Press the IRR key and the calculator will compute displaying a figure of IRR =13.5. At a discount
rate of 13.5% the net present value of the cash flows will equal 0.