In this short article, we will see how to use a financial calculator to compute the Net Present Value of a cash flow stream, the financial calculator used for illustrating this example is Texas Instruments BA II Plus.
For more details on computing Net Present Value of a cash flow stream, refer my previous article.
Consider a cash flow stream (-2, 1, 1, 1) , the Net Present Value of this cash flow stream at an annual interest rate 10% is given by
NPV = -2 + 1 / (1.1) + 1 / (1.1 ^ 2) + 1 / (1.1 ^ 3) = 0.48685
To calculate the Net Present Value of the above cash flow stream with a Texas Instruments BA II Plus Financial Calculator, follow the below steps.
1. Reset previous cash flow streams if any in the calculator (read the -> below as a sequence)
Use the following keys: 2ND -> RESET -> ENTER
2. Set the number of decimal places in the financial calculator
By default, the number of decimal digits displayed is 2 and often you need a better precision for a computation like NPV, therefore, set the number of decimal places to atleast 4, for doing this
Use the following keys: 2ND -> FORMAT -> 4 -> ENTER
3. Compute Net Present Value: Now we are ready to enter the stream of inputs for the cash flow stream (-2, 1, 1, 1) with interest rate 10% for computing Net Present Value, for this use the following keys
3.1 CF -> 2 -> - (Minus key) -> ENTER -> ↓
3.2 (CF1 appears) 1 -> ENTER -> ↓
3.3 (F01 appears with a default value 1, accept it as it is) ENTER -> ↓
3.4 (CF2 appears) 1 -> ENTER -> ↓
3.5 (F02 appears with a default value 1, accept it as it is) ENTER -> ↓
3.6 (CF3 appears) 1 -> ENTER -> ↓
3.7 (F03 appears with a default value 1, accept it as it is) ENTER -> ↓
3.8 (CF4 appears) Now Press NPV key
3.9 (I= appears, now enter the yearly interest rate) 10 -> ENTER -> ↓
3.10 (NPV appears) Press CPT key, now NPV = 0.4869 will be displayed.
Common mistake when entering interest rate: At times when you are in hurry, it's easy to enter the interest rate as 10/100 or 0.1, but note that the interest rate is already accepted as a percentage value, also when the interest is compounded more than once in a year, enter the interest rate value as yearly interest rate divided by the number of periods (for a 10% annual interest rate compounded monthly, this will be 10/12).