C h a p t e r 9 : C a p i t a l I n v e s t m e n t D e c i s i o n B a s i c s 2 6 7

SOLUTION TECHNIQUENet Present Value

Financial Calculator

The present value of an uneven cash flow stream can be solved with most financial

calculators by using the following steps:

• Enter the cash flows. Input the individual cash flows, in chronological order, into

the cash flow register, where they usually are designated as CF0 and CFj (CF1, CF2,

CF3, and so on). For the open MRI project, enter $2,500,000, $510,000, $535,500,

$562,275, $590,389, and $1,369,908 in that order into the cash flow register.

• Enter the discount rate. In this case, enter I = 10.

• Push the NPV key. The answer, $82,493, will appear.

Note that amounts entered into the cash flow register remain there until the register

is cleared. Thus, if a problem with eight cash flows had been previously worked, and

the new problem with only four cash flows is entered, the calculator assumes that the

final four cash flows from the first calculation belong to the second calculation. Be sure

to clear the register before starting a new time value analysis.

Spreadsheet

The solution can also be found with a spreadsheet, as the following exhibit shows.

A B C D12 10.0% Project cost of capital3 (2,500,000) Cash flow 04 $

$510,000 Cash flow 1

5 $ 535,500 Cash flow 26 $ 562,275 Cash flow 37 $ 590,389 Cash flow 48 $ 1,369,908 Cash flow 59

10 $82, 493 =NPV(A2,A4:A8)+A3 (entered into cell A10)

In this example, we have merely entered the net cash flows into the spreadsheet.

In a typical capital investment analysis, the spreadsheet would be used to calculate the

net cash flows (chapter 10 discusses cash flow analysis).

The project’s NPV is calculated in cell A10 using the NPV formula. The first entry in the

formula (A2) is the discount rate (opportunity cost of capital), while the second entry (A4:A8)

(continued)

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