# Chapter 5 Summary

### Key Concepts

• 5.1 Net Present Value
• The characteristics of making decisions including decision types, monetary sources, and interest rates.
• Making decisions through net present value.
• 5.2 Internal Rate of Return
• Using internal rate of return to choose whether to pursue one course of action.

## Glossary of Terms

Cash Flow. A movement of money into or out of a particular project.

Cost of Capital. A weighted average of all of the debt and equity financing rates used to provide needed funds for a project.

Internal Rate of Return ($IRR$). The annual rate of return on the investment being made such that the net present value of all cash flows in a particular project equals zero.

Net Present Value ($NPV$). The difference in today’s dollars between all benefits and costs for any given project.

### Formula & Symbol Hub

#### Symbols Used

• $NPV$ = net present value
• $IRR$ = internal rate of return

#### Formulas Used

• ##### Formula 5.1 – Net Present Value

$NPV = \text{(Sum of}\;PV\;\text{of All Future Cash Flows)} − \text{(Initial Investment)}$

or

$NPV = \text{(Sum of }\;PV\;\text{of Cash Inflows)} − \text{(Sum of}\;PV\;\text{of Cash Outflows)}$

## Calculator

• ### Cash Flow Worksheet

• Access the cash flow function by pressing $CF$ on the keypad.
• Always clear the memory using 2nd CLR WORK so that any previously entered data is deleted.
• Use the up arrow and down arrow to scroll through the various lines.
• Strictly adhere to the cash flow sign convention when using this function and press ENTER after keying in the data.
• To exit the window, press 2nd QUIT.
• The various lines are summarized below:
• $CFo$ = any cash flow today.
• $CXX$ = a particular cash flow, where $XX$ is one of a series of cash flow numbers starting with $01$. You must key in cash flows in order from the first time segment to the last. You cannot skip a time segment, even if it has a value of zero, because each time segment is a placeholder on the timeline.
• $FXX$ = the frequency of a particular cash flow, where $XX$ is the cash flow number. It is how many times in a row the corresponding cash flow amount occurs. This allows you to enter recurring amounts together instead of keying them in separately. By default, the calculator sets this variable to $1$.
• ### Net Present Value

• Use this function after you have entered all cash flows.
• Press $NPV$ on the keypad to access the function.
• Use the up arrow and down arrow to scroll through the window.
• To exit the window, press 2nd QUIT.
• This window has two lines:
• $I$ = the matching periodic interest rate for the interval of each time segment.
• $NPV$ = the net present value. Press $CPT$ to calculate this amount.

• ### Internal Rate of Return

• Use this function after you have entered all cash flows.
• Press $IRR$ on the keypad to access the function.
• Press $CPT$ button to perform the calculation. The output is in percent format.
• To exit the window, press 2nd QUIT.

Cash Flows 1: Net Present Value (NPV) and IRR Calculations by Joshua Emmanuel [2:52] (transcript available).