How to calculate NPV

Net present value brings every cash flow of a project back to today at your required return and adds them up. A positive NPV means the project beats that return.

Problem

A project costs $50,000 today and returns $12,000, $15,000, $18,000 and $20,000 over the next four years. At a 10% required return, what is its NPV?

Keystrokes

fREGCLx
0.00
Clears all registers, including earlier cash flows.
50000CHSgCFoPV
−50,000.00
The initial cost, at time zero.
12000gCFjPMT
12,000.00
Year 1.
15000gCFjPMT
15,000.00
Year 2.
18000gCFjPMT
18,000.00
Year 3.
20000gCFjPMT
20,000.00
Year 4.
10i
10.00
The required return.
fNPVPV
489.72
The net present value.

Answer

The NPV is $489.72. It’s positive, so at 10% the project is worth doing, if only just.

Why it works

gCFoPV stores the flow at time zero and each gCFjPMT stores the next year’s flow. fNPVPV discounts each by 1.1 to the power of its year and adds them up.

The display shows the number of the flow you just entered, so you can check that none is missing.

Changing one flow

Flows are kept in the storage registers: CFo in R0, year 1 in R1, and so on. To change year 3, key the new amount and press STO3, then fNPVPV again.

Questions

What does NPV equal zero mean?

The project earns exactly the discount rate. That rate is its IRR.

What if a year has no cash flow?

Enter 0 g CFj for it. Skipping it would shift every later flow a year earlier.