The Hewlett Packard 12c financial

calculator is a pretty handy, pretty sophisticated tool. In fact you can do

net present value and internal rate of return calculations on this calculator.

This video will walk you through using the blue keyboard and the gold

keyboard to make those calculations. First of all, big picture, why do we need

to know the net present value? Why do we need to know internal rate of return?

Remember on a company’s balance sheet on the right hand side is what it owes. And

then the difference between what it owns, on the left-hand side, and what it owes,

on the right hand side, is the equity in the business. And all this capital on the

right-hand side of the balance sheet has a cost. We’ll calculate the after-tax cost

of money on the right-hand side. That’s called the weighted average cost of

capital and we’ll need to earn at least that much when we put new assets on the

left hand side. So I’m gonna try to remember to put a link in the

description of this video that will send you to a short video about calculating

weighted average cost of capital. But big picture, we’re trying to put assets on

the balance sheet that earn more than what our capital costs us. When we’re

doing net present value and internal rate of return calculations, we’re gonna

use the blue keyboard, specifically the G CFo, the G CFj and the G Nj. This CFo

is for the initial cash flow. This is for each of the future cash flows and if your cash flow repeats, we’ll use the Nj. It isn’t 100% necessary

that you know this, but what the calculator is gonna do is it’s gonna

take that information that we give it and it’s gonna store it. For instance, that

CFo data is in this register here – zero. The first cash flow will be in the

register one, register two, register three, etc. And if we go past ten, it’ll use

point zero for eleven, point one for twelve, etc. And even if we run out of

those storage registers, the calculator is going to use the FV as, kind of like, a

last stop for memory storage. It’s also going to

use this “n” key to index all the things that we’re doing. And you only need to know

that all that information if you ever have to go back and change anything. Okay,

let’s pretend like we’ve figured out that our weighted average cost of

capital is 8% – our money on the right-hand side of our balance sheet

costs us 8%. We want to enter into projects, we want to make investments, we

want to do things on the left-hand side of the balance sheet that return more

than 8%. So let’s put these hypothetical cash flows into our calculator. I’m gonna

hit F clear registers. Technically you don’t have to do that because the

calculator is supposed to be smart enough to only use the new stuff that

you put in. But I just like to start with a clean slate every time. So 130,000

dollars is the initial cash flow OUT. So we’re gonna change the sign to make

that cash out and then we’re gonna hit G CFo. So we’ve told the calculator the initial cash outflow is one hundred and thirty

thousand dollars. Next is seven thousand dollars IN. Seven

thousand dollars G CFj. It doesn’t repeat. Ten thousand dollars out, so we’ll

change the sign on it G CFj. And so the facts are usually we buy a new

machine and after the first year we have to remodel it, so we have to invest some

cash. Then we get twenty thousand dollars three years in a row. So twenty thousand

dollars. There, I could hit twenty thousand dollars CFj, twenty thousand

CFj, twenty thousand dollars CFj, but there’s a shortcut key. i can just hit

three G Nj and that tells the calculator this is a group cash flow (a repeating

cash flow) and it repeats three times. Next we got $12,000 in, then eight

thousand dollars out and one hundred and seventy eight thousand five hundred

dollars in. Let’s check ourselves. Let’s see what the

cash flow at one is. So we’ll hit recall 1, and sure enough there’s our $7,000. So

like I say, the calculator uses the memory registers over here to store

these cash flows. And if it runs out of memory registers over here, as a

last-ditch effort, it will use the FV to store one final cash flow. Let’s plug in

the interest rate 8 i. And then hit F NPV – eleven thousand four and twenty nine dollars.

Since it has a positive net cash flow, we do this project. Doing this

project adds eleven thousand four and twenty nine dollars worth of value to

our company. In case it helps you, what the calculator did was it took the

initial cash flow (which was a negative number) and added to it the present value

of each of the future cash flows and gave us the NET present value. We

could also have found the internal rate of return. That’s the discount rate at

which the present value the future cash flows is exactly equal to the initial

cash outlay – or what the project earns. Let’s hit F IRR and it tells us that’s

nine point three seven. Since that’s more than eight percent, we do it. So the good

news about the IRR calculations is it’s easy to understand. Even a marketing

major gets that if your money costs eight percent and you invest it to earn

nine point three seven, that that project is a go. The bad news is if there’s

changes of signs here in these cash flows, there may be multiple solutions to

the equation whereby the i is the right amount to make the future cash flows

have a present value exactly equal to the initial two cash flow. And the other

one is that it can lead to some misleading decisions on mutually

exclusive projects. You might undertake a smaller project that has a higher rate

of return but that means you’re not getting as much value dollar-wise added

to your company. If you want to change one of the cash flows you simply look at

whichever one it is. Like recall one here. If you wanted to change

that to $8,000 you would something hit eight thousand store that in one. If you

need to change the number of repetitions for a cash flow, first set the “n” for

the cash flow PREVIOUS. Then hit the GNj key for the correct amount of

repetitions. Alright let’s see if we can check our work using Excel first let’s

check our IRR calculation. There’s nothing tricky about that in Excel. It’s

=IRR, and then you designate the values close it up and there’s our nine

point three seven percent. Now let’s check the NPV and that’s just a tiny bit

trickier. We’ll tell Excel=NPV. It wants to

know a rate. We’ll hit point zero eight. And then it wants to know the values.

We’ll tell it these values. We’ll close up the parentheses and lo and behold we

get the wrong answer because Excel assumes that this first cash flow is

received at the END of the first period. So we’ve got to take this whole answer

here and what we’ve got to do is we’ve got to move it forward one period. And I

like to do that by multiplying it times one plus the interest rate, which is one

plus point zero eight. And so hopefully when I hit enter, we get exactly the

right net present values. So when you go to check yourself in Excel remember that

Excel assumes that that first cash flow is made at the END of the first period

when in fact it’s made at the BEGINNING of the first period. I hope that helps. you

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