Cash Flow/Net Present Value

The BA 2 calculator series. We are going to look at the cash flow function

to look at the net present value. So we will look at the cash flow function

and the net present value function on your calculator. When you have a cash flow question, the important

thing to do is set up your time line. So that is the first thing you have to do

is set up your time line. So we need to read through the question and

set up our time line based on the information from the question. The startup cost for the product will cost

will require the outlay of $700,000 today and another $700,000 in one year. The product will hit the market in the beginning

of year 3, and produce profits of $400,000 at the end of each of the next 5 years. The company will sell the product at the end

of the 5 year production run for $300,000. If the company’s rate of return is 12%,

should you go ahead and produce the product? Alright, if we go back to the top, the startup

costs require us to pay $700,000 today and another $700,000 in one year. Now the product will not hit the market until

the beginning of year 3 and produce profits of $400,000 for the next 5 years. Oh, at the end of each of the next 5 years. The company will sell the product at the end

of the 5 year production for $300,000, so we will sell at the end for $300,000. If the company’s rate of return is 12%,

should you go ahead and produce the product. Ok. So, let’s draw a time line. First thing is it says today we have to pay

out $700,000, and then in one year we have to pay out another $700,000. So I am using negatives because they are outflows

of money. Remember, the product will not reach the market

until the beginning of year 3. So, nothing is going out, there is no money

going out in year 2 and no money coming in in year 2. And then early in year 3, in here somewhere,

that is where the product hits the market and we start producing profit for $400,000

for the next 5 years. So year 3, year 4, year 5, year 6, year, 7,

we will produce profits of $400,000. So our timeline should look something like

this. So we are going to pay $700,000 out today

and $700,000 out in one year. Then we are just going to develop the product

for that year so there is nothing coming in or going out at the end of the second year. Early on in the 3rd year the product hits

the market and produces profit of $400,000 for five years. So 1, 2, 3, 4, 5, and then at the end of the

5 years we will sell it for $300,000. So we get another $300,000 here at the end,

so at the end of the 5 years we are actually getting $700,000. Now to do this on the calculator, you push

the CF button, it is right next to the 2nd function button. You do not have to push the 2nd function;

you just push the CF button. Then, to make sure there is no old data to

corrupt the new data you go 2nd clear work, clear work is the CEC button down in the bottom

left corner. So 2nd clear work. Now, CF zero means what did we do today. So what we did today is pay out $700,000 so

we want to type that in and press the +/- button, and then the enter button. You have to remember the +/- button because

remember this is a negative payment. Then it goes to CO 1, CO 1 we paid out another

$700,000, so again $700,000 negative, enter, down. F stands for frequency, so how many times

in a row did that happen. So this was CF-0 here, this is CO1, as you

can see it only happened once. So FO1 automatically comes up 1, after you

hit the enter button for Co1. FO1 automatically comes up 1, so we can push

the down arrow, and go to CO2. Now, for CO2 that is where the 0 is, the 0

here is CO2 and that only happened once, so we type in the 0, enter, down arrow, enter

is already on your screen so just hit the enter, down arrow, it only happened once,

so push the down arrow to go to CO3. Now, at CO3, that is when we start making

the $400,000. And we do that 1,2,3,4, we do that 4 times

in a row. So we type $400,000, hit the enter button,

then the down arrow. So 400,000, enter, down. Then we hit the FO3, and we said that was

1,2,3,4, 4 times, so we actually type in 4, enter. This tells your calculator that the $400,000

happens 4 times in a row. Then we go to the last one, CO4 this is the

last one over here, the $700,000. So 700,000, enter, down arrow, and that happened

just once, so we just leave that as one. Once we are done we then hit the NPV button,

the NPV button is right next to the CF, just go ahead and hit that, it is not a second

function. And what comes up is I, this is our rate of

return. So, the rate of return was 12%, so for ”I”

we type in the 12, enter, the down arrow, this brings us to NPV, this stands for Net

Present Value, and what your calculator will do is it will take all the information in

the cash flow and turn it into the present value amount. You have to hit compute to do that. So hit compute, and it will take all the information

in the cash flow function and change it into a present value amount. So I hit compute. I get a negative answer. I get -39813.03, since it is 028 it round

to 3 cents. Now, when you are computing net present value,

what you want is a zero or positive answer. So if this happens, you get a zero or positive

answer you say YES, if you get a negative answer, then you say NO. Our answer was -$39,813.03, so should the

company go ahead with this product? NO we should not produce this product. Alright! So that is the cash flow function and the

net present value function of your calculator. This has been another presentation of the

Wise Guys Tutoring Videos. If you have any questions you can contact

Ron in the Learning Assistance Center. Thank you and have a good day.

wow thanks!!!!!

Great video.

we need more people like you helping educating america thank you very much

Thanks to you, I may actually pass my class… My teacher sucks. Good video

thank you

thank you .. my exam is today :))

this was the greatest video!!! thank you I think I will pass my class thanks to you!!!!

this video was great

cheers 🙂

Thanks Guys!!

Can you please explain what are all those CF0, C01 etc stuff. I dont have this calculator and I am not a business student so please explain how this could be done without using a calculator.

Btw you videos are useful thanks

If all are given but we need to figure I. How do we do this ?

Love this presentation ….really helpful …Thanks a lot RRCWiseguys…..

Hey!

I have a similar assignment about MCFC, I have a senior and some assumptions

but I really dont understand what to do exactly

I really need help if you dont mind 🙁

12% is not really that bad. As long as you make a return. I would think.

Especially with profits at $400,000

How do you do CF if the cashflows are perpetual???????

I really like your videos, they definitely help with my online finance class, because my book doesn't really explain how to use the calculator.

seth rogan is teaching finance.

good one. thanks

Thanks a lot!! Really clear and helpful!

thanks i really needed that.

The calculation is not right. He is missing the Co5, Co6, and Co7 as the income coming for the next five years as illustrated in the question. The correct answer is NPV = -177517.79

Thanks for the video. Such a huge help

great .. thank you it's helpful

i have an exam tomorrow im so gonna fail!!

perfect thank you so much!

thank you!!!

i finally understood this 🙂

Very good example, thanks

Excellent !

why did not u show a formula to calculate the cash flow and NPV?

i do not have those functions in my calculator.

thx

You'r a savior

THANKS, I wish I could pay u to be my personal teacher, your so good.

I love you RRCWiseguys!!

This really stopped me from going bald!

Thanks man!

I love how easy you explain a seem to be complicated problem! Big Thank you!

lifesaver

Thanks for these- I'm working on executive finance through WGU with no real explanation of the other calculator functions. Very helpful.

God bless you

how do I find the missing cash flow?

saved my life thanks

Dis video is so confusing…u shul xplain clearly.Why r u writing how to use calculator ?xplain without using calculator so that concept may get clear 😏

Sir I was looking for your petty cash and bad debt expense tutorial. That tutorial helped me a lot in the last semester. Can you please give a link for that tutorial?

These tutorials are very helpful to get the concepts clearly. After this session don’t you have another tutorials specially for bond duration, nPr, nCr??

Thank you wise guys. There are manyexamples how to properly use a calculator when solving these type on problems.