15. BA II Plus Calculator: Cash Flow – Net Present Value

15. BA II Plus Calculator: Cash Flow – Net Present Value


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.

44 thoughts to “15. BA II Plus Calculator: Cash Flow – Net Present Value”

  1. 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

  2. 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 🙁

  3. 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.

  4. 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

  5. why did not u show a formula to calculate the cash flow and NPV?
    i do not have those functions in my calculator.
    thx 

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

  7. 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 😏

  8. 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?

  9. 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??

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