The net present value is an important and helpful tool to use when assessing the return on investment. While it is possible to calculate the net present value by hand, using an NPV financial calculator like the BA II Plus simplifies the process.
What Is Net Present Value?
According to Harvard Business Review, net present value, often shortened to NPV, is a cash flow's present value at a determined rate of return for a project compared to the initial investment. It's one of the methods used to calculate the return on investment, also known as ROI, to ascertain its priority or whether the project is worth taking on.
The net present value is often chosen over other ROI methods, such as internal rate of return and payback method, because it produces an easily comparable number and considers the time value of money in its calculation, which transforms future cash flows into today's dollar's buying power.
How Is the NPV Calculated?
While it's easier to calculate the NPV with a financial calculator, it can be done by hand. To calculate the NPV by hand, you will need to know the discount rate. According to Harvard Business Review, the discount rate depends on the company. It is either the rate of return investors expect from an investment or the cost of borrowing money.
To calculate the NPV, you will use the following equation, in which "FV" represents the projected cash flow and "n" represents the cash flow's number of periods beyond the present: FV1 / (1 + Discount Rate)n
Use the equation to calculate the figure for each projected year, then add the values together to find the present value of projected returns. Then, subtract the initial investment from the value to determine the NPV. If the resulting figure is positive, then the project may be worth the investment; however, a resulting negative figure indicates the project may not be worth pursuing.
The BA II Plus Financial Calculator
The BA II Plus Calculator is a financial calculator made by Texas Instruments, designed specifically for business professionals and students, Texas Instruments writes. It is ideal to use for accounting, economics, finance, marketing, mathematics, real estate, science and statistics applications.
When calculating the net present value, the financial calculator can store up to 24 uneven cash flows with up to four-digit frequencies, according to Texas Instruments. You can also assess the impact certain changes have on the cash flow when you edit the inputs.
NPV Financial Calculator
To use an NPV financial calculator, specifically the BA II Plus Calculator, you'll need to first enter the uneven cash flows into the cash flow register on the calculator. According to Eastern Illinois University, this is done by pressing the CF key on the calculator.
Once the cash flow register is opened, navigate the register with the arrow keys on the top row of the calculator to input the values in the appropriate fields: CFo, the initial cash flow; C01, the cash flow for year one; C02, the cash flor for year two and so on. If there is the same cash flow occurring for over a year, use the F fields.
Once you have inputted the cash flows, press NPV on the calculator to solve. Next, navigate to the "NPV=" field and input the rate of return. Then, press the CPT key to determine the NPV on a financial calculator.
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