CP

ABCDEF

1 Project S

2 r  10%

3 Time 1234 5

4 Cash flow  1000 500 400 300 100

5 NPV  $78.82

6 IRR  14.5%

266 CHAPTER 7 The Basics of Capital Budgeting: Evaluating Cash Flows

Note that the equation has one unknown, NPV. Now all you need to do is to ask the

calculator to solve the equation for you, which you do by pressing the NPV button

(and, on some calculators, the “compute” button). The answer, 78.82, will appear on

the screen.^3

Most projects last for more than four years, and, as you will see in Chapter 8, we

must go through a number of steps to develop the estimated cash flows. Therefore, fi-

nancial analysts generally use spreadsheets when dealing with capital budgeting proj-

ects. For Project S, this spreadsheet could be used (disregard for now the IRR on Row

6; we discuss it in the next section):

(^3) The Technology Supplementfor this text explains commonly used calculator applications for a variety of cal-
culators. The steps for two popular calculators, the HP-10B and the HP-17B, are shown below.
HP-10B: (1) Clear the memory. (2) Enter CF 0 as follows: 1000. (3) Enter CF 1 as follows:
500. (4) Repeat the process to enter the other cash flows. Note that CF 0, CF 1, and so forth, flash
on the screen as you press the button. If you hold the button down, CF 0 and so forth, will remain
on the screen until you release it. (5) Once the CFs have been entered, enter r I 10%: 10.
(6) Now that all of the inputs have been entered, you can press to get the answer, NPV 
$78.82. (7) If a cash flow is repeated for several years, you can avoid having to enter the CFs for each year.
For example, if the $500 cash flow for Year 1 had also been the CF for Years 2 through 10, making 10 of
these $500 cash flows, then after entering 500 the first time, you could enter 10.
This would automatically enter 10 CFs of 500.
HP-17B: (1) Go to the cash flow (CFLO) menu, clear if FLOW(0) ? does not appear on the screen.
(2) Enter CF 0 as follows: 1000. (3) Enter CF 1 as follows: 500. (4) Now, the
calculator will ask you if the 500 is for Period 1 only or if it is also used for several following periods. Since
it is only used for Period 1, press to answer “1.” Alternatively, you could press and
then to turn off the prompt for the remainder of the problem. For some problems, you will want
to use the repeat feature. (5) Enter the remaining CFs, being sure to turn off the prompt or else to specify
“1” for each entry. (6) Once the CFs have all been entered, press and then. (7) Now en-
ter r I 10% as follows: 10. (8) Now press to get the answer, NPV $78.82.
(^4) You could click the function wizard, fx,then Financial, then NPV, and then OK. Then insert B2 as the rate
and C4:F4 as “Value 1,” which is the cash flow range. Then click OK, and edit the equation by adding B4.
Note that you cannot enter the –$1,000 cost as part of the NPV range because the ExcelNPV function as-
sumes that the first cash flow in the range occurs at t 1.
I% NPV
EXIT CALC
#T?
INPUT EXIT
/
INPUT INPUT
CFj Nj
NPV
I/YR
CFj
CFj
/
CFj
InExcel,the formula in Cell B5 is:
B4NPV(B2,C4:F4),and it results in a value
o f$78.82.^4 For a simple problem such as this, setting up a spreadsheet may not
seem worth the trouble. However, in real-world problems there will be a number of

264 The Basics of Capital Budgeting: Evaluating Cash Flows