Calculate the total present value of each of the cash flows, starting from period 1 (leave out the initial outlay).Here are the steps in the algorithm that we will use: That means that we have to use a little ingenuity to calculate the MIRR. Unfortunately, financial calculators don't have an MIRR key like they have an IRR key. The modified internal rate of return (MIRR) solves this problem by using an explicit reinvestment rate. Therefore, the IRR can be misleadingly high at times. A good project may have an IRR that is considerably greater than any reasonable reinvestment assumption. The most important flaw is that it implicitly assumes that the cash flows will be reinvested for the life of the project at a rate that equals the IRR. However, the IRR suffers from a couple of serious flaws. The IRR has been a popular metric for evaluating investments for many years - primarily due to the simplicity with which it can be interpreted. Example 4.2 - Modified Internal Rate of Return This time, you'll press IRR and then CPT, and you'll find that the IRR is 19.5382%. Solving for the IRR is done exactly the same way, except that the discount rate is not necessary. Input 12 for I when prompted, and then Enter down arrow and CPT. Note that we need to supply a discount rate so the calculator will now prompt you for it. Press CF to get back into cash flow mode, and then input -800 Enter for CF0. Since we have already entered all of the cash flows, we only need to change the initial outlay. Generally speaking, you'll pay for an investment before you can receive its benefits so the cost (initial outlay) is said to occur at time period 0 (i.e., today). To solve this problem we must not only tell the calculator about the annual cash flows, but also the cost (previously, we set the cost to 0 because we just wanted the present value of the cash flows).
![cashflow calculator cashflow calculator](https://www.researchgate.net/publication/228318075/figure/tbl1/AS:670399213867029@1536847036927/Cash-flow-calculation-of-the-case-example.png)
Suppose that you were offered the investment in Example 3 at a cost of $800. Example 4 - Net Present Value (NPV)Ĭalculating the net present value (NPV) and/or internal rate of return (IRR) is virtually identical to finding the present value of an uneven cash flow stream as we did in Example 3. Otherwise, you will very likely get a wrong answer. However, if you are starting a completely new problem you should always press 2nd CE/C to be sure that the cash flows from any previous problem are cleared. This will allow you to scroll through the cash flows that you entered by using the arrow keys. Note: At any time, you can return to cash flow mode by pressing CF. Pretty easy, huh? (Ok, at least its easier than adding up the future values of each of the individual cash flows.) Now press CPT FV and you'll see that the future value is $1,762.65753. Clear the financial keys ( 2nd FV) then enter -1000.17922 into the PV key. In this case, we've already determined that the present value is $1,000.17922. Next, find the future value of that present value and you have your solution. Realize that one way to find the future value of any set of cash flows is to first find the present value. There is no key to do this so we need to use a little ingenuity. Now suppose that we wanted to find the future value of these cash flows instead of the present value. Example 3.1 - Future Value of Uneven Cash Flows
![cashflow calculator cashflow calculator](https://www.got-it.ai/solutions/excel-chat/wp-content/uploads/2019/03/Figure-1-How-to-find-NPV-when-cash-flows-are-quarterly.png)
Note that you can easily change the interest rate by pressing the up arrow key to get back to that step. We find that the present value is $1,000.17922. To get the present value of the cash flows, press CPT. Type 12 Enter and then press down arrow and you will see NPV = 0.00. Now, press the NPV key and you will be prompted for the interest rate (I = ). Now, press CF then 0 Enter down arrow, 100 Enter down arrow (twice), 200 Enter down arrow (twice), 300 Enter down arrow (twice), 400 Enter down arrow (twice), and finally 500 Enter down arrow (twice). For now, just accept the default frequency of 1 each time. The calculator will prompt you to enter each cash flow and then the frequency with which it occurs.
![cashflow calculator cashflow calculator](https://images-eu.ssl-images-amazon.com/images/I/617hLeJc4JL.png)
Again, we must clear the cash flow registers first. In this case we need to press CF 2nd CE/C (note that pressing 2nd FV will have no effect on the cash flow registers). All we need to do is enter the cash flows exactly as shown in the table.
![cashflow calculator cashflow calculator](https://static.helloskip.com/blog/2021/10/EIDL-Increase-Cash-Flow-Calculator.png)
We could solve this problem by finding the present value of each of these cash flows individually and then summing the results (the principle of value additivity). How much would you be willing to pay for this investment if your required rate of return is 12% per year?