Chapter 15
Managerial Accounting
NPV and IRR Using the BAII Plus
Professional Calculator
Prepared by Diane Tanner
University of North Florida
Net Present Value (NPV) and
Internal Rate of Return (IRR)
 Both are capital budgeting methods
 Both use time value of money concepts
 Both allow the comparison of future cash flows at
the date the investment is expected to occur
 NPV
 Calculates the dollar value that the cash flows
are worth today
 IRR
 Calculates the rate of return that the cash flows
are expected to generate
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Net Present Value Method (NPV)
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Step 1
Identify all cash flows of a potential investment
 Draw a time line and label inflows and outflows
Step 2
Discount all cash flows to their present values
 Use required rate of return (hurdle rate)
Step 3
Determine the NPV
 Combine (add/subtract) the PV of cash inflows
with the PV of the outflows
Step 4
Accept or reject the proposal
How to Interpret & Assess NPV
If the NPV is zero
The investment will earn a return equal to the required
rate of return. Accept the investment because it earns
exactly the minimum return stipulated by management.
If the NPV is positive
The investment will earn a return greater than the
required rate of return. Accept the investment because it
earns more than the minimum return stipulated by
management.
If the NPV is negative
The investment will earn a return less than the required
rate of return. Reject the investment because it earns less
than the minimum return stipulated by management.
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Internal Rate of Return (IRR)
 An alternative to the NPV method
 The rate of return that equates the present
value of future cash flows to the investment
outlay
 The rate that generates a zero NPV
 Useful when
 Comparing two or more investments
 Comparing to the company’s required rate of
return
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Interpret IRR
Assume the IRR is 10%.........
 The investment will generate an
annual return of cash flows of 10%.
If the IRR is equal to the RRR
The investment should be accepted because it earns
the minimum rate stipulated by management.
If the IRR is greater than the RRR
The investment should be accepted because it earns
more than the minimum rate stipulated by
management.
If the IRR is less than the RRR
The investment should be rejected because it earns
less than the minimum stipulated by management.
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BAII Plus Professional
 Required for FIN 3403,
your next business class
 Contains a number of
different financial
functions
 Much like a worksheet
in Excel® in that it
contains cells that hold
data
Cash Inflows and Outflows in the BAII
 Amounts inputted stay in the CF worksheet until
erased
 Even if you turn your calculator off
 Must specify cash flow directions
 Cash inflows
 Enter as positive numbers
 Cash outflows
 Entered as negative numbers
 Cash flow (CF) worksheet
 A stored worksheet/function in the BAII calculator
 Used to determine NPV and IRR of a series of future
cash flows
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Frequency Function on BAII
 Useful when the annual cash flow amount is
expected to be the same numeric amount for
multiple years
 Frequency field appears as F01, F02, etc.
 Where F = frequency
 01, 02 = the period correlating to the respective
cash flows, e.g., C01, C02, etc.
 If the cash flow amount you entered is expected to
be the same for two years, change the frequency
from 1.00000 to 2.00000
 If the cash flow amount you entered is expected to
be the same for three years, change the frequency
from 1.00000 to 3.00000
Data Input on the BAII Plus Professional
• To open the CF
worksheet: Press [CF]
• Close and exit from the CF
worksheet:
• Press [CF] [2nd] [CPT]
Data Input on the BAII Plus Professional
• Default setting =
2 decimal places
• Can display up to 8 places
How to set to 5 decimals
Press [2nd] [Format]
The screen will display:
DEC
2.00
Recommended for ACG 2071
Enter [5]
as the number of
decimals places to be
displayed
Press [Enter] [2nd] [CPT]
WD, Inc. is deciding whether to make an
investment of $2,000 for a machine that
is expected to provide net cash inflows of
$500 for year 1, $800 for year 2, and
$1,400 for year 3. WD’s required rate of
return is 8.3%. Evaluate.
CFO
(2000)
C01
C02
C03
500
800
1400
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Ace, Inc. is deciding whether to make
an investment of $2,000 for a
machine that is expected to provide
net cash inflows of $800 per year for
3 years. WD’s required rate of return
is 5.1%. Evaluate.
CFO
(2000)
13
C01
C02
C03
800
800
800
The End
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IRR on the BAII Calculator
WD, Inc. is deciding whether to make an investment of
$2,000 for a machine that is expected to provide net cash
inflows of $500 for year 1, $800 for year 2, and $1,400 for
year 3. WD’s required rate of return is 8.3%. Evaluate.
Step 1: Enter the CF worksheet: [2nd] [CF]
Step 2: Clear the cash flow worksheet: [2nd] [CE/C]
The screen will display CF0 = 0.0000
Step 3: Input the cash flow for year 0: [2000] [+/-] [Enter]
The +/- key toggles from positive to negative.
Step 4: Press [ ]. Input the CF for year 1: [500] [Enter]
continued
IRR on the BAII cont.
WD, Inc. is deciding whether to make an investment of
$2,000 for a machine that is expected to provide net cash
inflows of $500 for year 1, $800 for year 2, and $1,400 for
year 3. WD’s required rate of return is 8.3%. Evaluate.
Step 5: Press []. Accept the ‘1’ default for FO1
by pressing [] again.
Step 6: Input the CF for year 2: [800] [Enter]
Step 7: Press [] twice and input the CF for year 3:
[1400] [Enter]
Step 8: Press [IRR].
Answer = 13.98%
Step 9: Press [] [CPT].
NPV on the BAII
WD, Inc. is deciding whether to make an investment of
$2,000 for a machine that is expected to provide net cash
inflows of $500 for year 1, $800 for year 2, and $1,400 for
year 3. WD’s required rate of return is 8.3%. Evaluate.
Step 1: Enter the CF worksheet: [2nd] [CF]
Step 2: Clear the cash flow worksheet: [2nd] [CE/C]
The screen will display CF0 = 0.0000
Step 3: Input the CF for year 0: [2000] [+/-] [Enter]
The +/- key toggles from positive to negative.
Step 4: Press . Input the CF for year 1: [500] [Enter]
continued
NPV on the BAII cont.
WD, Inc. is deciding whether to make an investment of
$2,000 for a machine that is expected to provide net cash
inflows of $500 for year 1, $800 for year 2, and $1,400 for
year 3. WD’s required rate of return is 8.3%. Evaluate.
Step 5: Press []. Accept the ‘1’ default for FO1 by
pressing [] again.
Step 6: Input the CF for year 2: [800] [Enter]
Step 7: Press [] twice and input the CF for year 3: [1400]
[Enter]
Step 8: Press [NPV]. At the I= prompt, input 8.3 [Enter]
for the interest rate.
Step 9: Press [] [CPT].
Answer = $245.91
Calculating NPV and IRR
 If you need to calculate both NPV and IRR
 Input the cash flows only once
 To calculate NPV immediately after you solve
for IRR, perform only steps 8 and 9 of the NPV
instructions:
 Step 8: Press [NPV]. At the I= prompt, input
8.3 [Enter] for the interest rate.
 Step 9: Press [] [CPT]
 To calculate IRR after you solve for NPV,
perform only steps 8 and 9 of the IRR
instructions:
 Step 8: Press [IRR]
 Step 9: Press [] [CPT]
The End
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