Using the Hewlett Packard 10BII calculator to solve capital budgeting problems'

1

• Using the Hewlett Packard 10BII calculator to
  solve capital budgeting problems.

CST IRR/YR
PRC NPV
CFj Nj
2

• Important keys for capital budgeting problems
• CFj stands for cash flow j.
• You will see how to enter an entire timeline of
  cash flows by using the CFj key.

CST IRR/YR
PRC NPV
CFj Nj
3

• Important keys for capital budgeting problems
• Nj can save time if you have the same cash flow
  appearing many times in a row.

CST IRR/YR
PRC NPV
CFj Nj
4

• For example, to enter 200 cash flows for years 1
  through 20
• Type 200 and push CFj.
• Type 20, push shift and then push CFj.
• This enters 20 consecutive 200 cash flows.

CST IRR/YR
PRC NPV
CFj Nj
5

• NPV stands for net present value.
• First, enter cash flows using CFj.
• Then, push shift and push PRC to solve for
  NPV.

CST IRR/YR
PRC NPV
CFj Nj
6

• IRR/YR stands for internal rate of return per
  year.
• Push shift and push CST to solve for IRR/YR.

CST IRR/YR
PRC NPV
CFj Nj
7
Summary Problem(page 118 in note guide)

• Enter the cash flows only once.
• Find the IRR.
• Using a discount rate of 15, find NPV.
• Add back IO and divide by IO to get PI.
• The following slides will show you how to do this.

8

• Compounding
• These are annual cash flows, so be sure your
  calculator is set for annual compounding.
• Type 1, push shift, then push PMT.

CST IRR/YR
PRC NPV
CFj Nj
9

• Compounding
• These are annual cash flows, so be sure your
  calculator is set for annual compounding.
• Type 1, push shift, then push PMT.

1 P_Yr
CST IRR/YR
PRC NPV
CFj Nj
10

• Entering cash flows
• Type 900, push /-, then push CFj.

CST IRR/YR
PRC NPV
CFj Nj
11

• Entering cash flows
• Type 900, push /-, then push CFj.

-900
CST IRR/YR
PRC NPV
CFj Nj
12

• Entering cash flows
• Type 900, push /-, then push CFj.
• You will briefly see 0 on the screen,
  indicating that -900 is the cash flow that occurs
  at time 0.

-900
CST IRR/YR
PRC NPV
CFj Nj
13

• Entering cash flows
• Type 900, push /-, then push CFj.
• You will briefly see 0 on the screen,
  indicating that -900 is the cash flow that occurs
  at time 0.

0
CST IRR/YR
PRC NPV
CFj Nj
14

• Entering cash flows
• Type 900, push /-, then push CFj.
• You will briefly see 0 on the screen,
  indicating that -900 is the cash flow that occurs
  at time 0.

-900.00
CST IRR/YR
PRC NPV
CFj Nj
15

• Entering cash flows
• Type 300 and push CFj.

CST IRR/YR
PRC NPV
CFj Nj
16

• Entering cash flows
• Type 300 and push CFj.

300
CST IRR/YR
PRC NPV
CFj Nj
17

• Entering cash flows
• Type 300 and push CFj.
• You will briefly see 1 on the screen,
  indicating that 300 is the cash flow that occurs
  at year 1.

300
CST IRR/YR
PRC NPV
CFj Nj
18

• Entering cash flows
• Type 300 and push CFj.
• You will briefly see 1 on the screen,
  indicating that 300 is the cash flow that occurs
  at year 1.

1
CST IRR/YR
PRC NPV
CFj Nj
19

• Entering cash flows
• Type 300 and push CFj.
• You will briefly see 1 on the screen,
  indicating that 300 is the cash flow that occurs
  at year 1.

300.00
CST IRR/YR
PRC NPV
CFj Nj
20

• Entering cash flows
• Type 400 and push CFj.

CST IRR/YR
PRC NPV
CFj Nj
21

• Entering cash flows
• Type 400 and push CFj.

400
CST IRR/YR
PRC NPV
CFj Nj
22

• Entering cash flows
• Type 400 and push CFj.
• You will briefly see 2 on the screen,
  indicating that 400 is the cash flow that occurs
  at year 2.

400
CST IRR/YR
PRC NPV
CFj Nj
23

• Entering cash flows
• Type 400 and push CFj.
• You will briefly see 2 on the screen,
  indicating that 400 is the cash flow that occurs
  at year 2.

2
CST IRR/YR
PRC NPV
CFj Nj
24

• Entering cash flows
• Type 400 and push CFj.
• You will briefly see 2 on the screen,
  indicating that 400 is the cash flow that occurs
  at year 2.

400.00
CST IRR/YR
PRC NPV
CFj Nj
25

• Entering cash flows
• Push CFj again.
• (This is because 400 occurs again at year 3.)

400
CST IRR/YR
PRC NPV
CFj Nj
26

• Entering cash flows
• Push CFj again.
• You will briefly see 3 on the screen,
  indicating that 400 is the cash flow that occurs
  at year 3.

400
CST IRR/YR
PRC NPV
CFj Nj
27

• Entering cash flows
• Push CFj again.
• You will briefly see 3 on the screen,
  indicating that 400 is the cash flow that occurs
  at year 3.

3
CST IRR/YR
PRC NPV
CFj Nj
28

• Entering cash flows
• Push CFj again.
• You will briefly see 3 on the screen,
  indicating that 400 is the cash flow that occurs
  at year 3.

400.00
CST IRR/YR
PRC NPV
CFj Nj
29

• Entering cash flows
• Type 500 and push CFj.

CST IRR/YR
PRC NPV
CFj Nj
30

• Entering cash flows
• Type 500 and push CFj.

500
CST IRR/YR
PRC NPV
CFj Nj
31

• Entering cash flows
• Type 500 and push CFj.
• You will briefly see 4 on the screen,
  indicating that 500 is the cash flow that occurs
  at year 4.

500
CST IRR/YR
PRC NPV
CFj Nj
32

• Entering cash flows
• Type 500 and push CFj.
• You will briefly see 4 on the screen,
  indicating that 500 is the cash flow that occurs
  at year 4.

4
CST IRR/YR
PRC NPV
CFj Nj
33

• Entering cash flows
• Type 500 and push CFj.
• You will briefly see 4 on the screen,
  indicating that 500 is the cash flow that occurs
  at year 4.

500.00
CST IRR/YR
PRC NPV
CFj Nj
34

• Entering cash flows
• Type 600 and push CFj.

CST IRR/YR
PRC NPV
CFj Nj
35

• Entering cash flows
• Type 600 and push CFj.

600
CST IRR/YR
PRC NPV
CFj Nj
36

• Entering cash flows
• Type 600 and push CFj.
• You will briefly see 5 on the screen,
  indicating that 600 is the cash flow that occurs
  at year 5.

600
CST IRR/YR
PRC NPV
CFj Nj
37

• Entering cash flows
• Type 600 and push CFj.
• You will briefly see 5 on the screen,
  indicating that 600 is the cash flow that occurs
  at year 5.

5
CST IRR/YR
PRC NPV
CFj Nj
38

• Entering cash flows
• Type 600 and push CFj.
• You will briefly see 5 on the screen,
  indicating that 600 is the cash flow that occurs
  at year 5.

600.00
CST IRR/YR
PRC NPV
CFj Nj
39

• Solve for IRR
• Push shift.

600.00
CST IRR/YR
PRC NPV
CFj Nj
40

• Solve for IRR
• Push shift.

600.00
CST IRR/YR
PRC NPV
CFj Nj
41

• Solve for IRR
• Push shift.
• Push CST.

600.00
CST IRR/YR
PRC NPV
CFj Nj
42

• Solve for IRR
• Push shift.
• Push CST.
• The internal rate of return per year is 34.37.

34.37
CST IRR/YR
PRC NPV
CFj Nj
43

• Solve for NPV
• Enter the discount rate type 15 and push I/YR.

CST IRR/YR
PRC NPV
CFj Nj
44

• Solve for NPV
• Enter the discount rate type 15 and push I/YR.

15
CST IRR/YR
PRC NPV
CFj Nj
45

• Solve for NPV
• Enter the discount rate type 15 and push I/YR.
• Push shift.

15.00
CST IRR/YR
PRC NPV
CFj Nj
46

• Solve for NPV
• Enter the discount rate type 15 and push I/YR.
• Push shift.
• Push PRC.

15.00
CST IRR/YR
PRC NPV
CFj Nj
47

• Solve for NPV
• Enter the discount rate type 15 and push I/YR.
• Push shift.
• Push PRC.
• The NPV is 510.52.

510.52
CST IRR/YR
PRC NPV
CFj Nj
48

• Note on the Profitability Index (PI)
• NPV is the PV of the cash flows minus the initial
  outflow.
• PI is the PV of the cash flows divided by the
  initial outflow.

510.52
CST IRR/YR
PRC NPV
CFj Nj
49

• Note on the Profitability Index (PI)
• Therefore, after solving NPV, we can solve the PI
  by adding back the initial outflow, and then
  dividing by the initial outflow.

510.52
CST IRR/YR
PRC NPV
CFj Nj
50

• NPV and PI
• Think of NPV as benefit minus cost.
• An NPV greater than 0 is acceptable!
• Think of PI as benefit divided by cost.
• A PI greater than 1 is acceptable!

510.52
CST IRR/YR
PRC NPV
CFj Nj
51

• Solve for PI
• Add back the initial outflow
• Push and then type 900.

510.52
CST IRR/YR
PRC NPV
CFj Nj
52

• Solve for PI
• Add back the initial outflow
• Push and then type 900.

900
CST IRR/YR
PRC NPV
CFj Nj
53

• Solve for PI
• Add back the initial outflow
• Push and then type 900.
• Push .

900
CST IRR/YR
PRC NPV
CFj Nj
54

• Solve for PI
• Add back the initial outflow
• Push and then type 900.
• Push .
• You should get 1,410.52.
• This is just the PV of cash flows 1 through 5.

1,410.52
CST IRR/YR
PRC NPV
CFj Nj
55

• Solve for PI
• Divide by the initial outflow

1,410.52
CST IRR/YR
PRC NPV
CFj Nj
56

• Solve for PI
• Divide by the initial outflow
• Push and then type 900.

1,410.52
CST IRR/YR
PRC NPV
CFj Nj
57

• Solve for PI
• Divide by the initial outflow
• Push and then type 900.
• Push .

900
CST IRR/YR
PRC NPV
CFj Nj
58

• Solve for PI
• Divide by the initial outflow
• Push and then type 900.
• Push .
• You should get 1.57.

1.57
CST IRR/YR
PRC NPV
CFj Nj
59

• Solve for PI
• Divide by the initial outflow
• Push and then type 900.
• Push .
• You should get 1.57.
• This is the PI.

1.57
CST IRR/YR
PRC NPV
CFj Nj