Go to scroll down with the arrow key until you see Discounted Payback. So that’s going to be longer than two and two-thirds of the year. The Discounted Payback Period is how long it takes to get your original investment back in present value dollars, in discounted future cash flow dollars. Once we get to the Payback Period, if you want to compute that, press COMPUTE, and it will tell you it’s 2.67 years, as we suspected. Then we can also get to NFV, Net Future Value, and then finally to the Payback Period. Tell it the discount rate is 10, enter that 10, scroll down, and get to NPV.
So we enter all those single cash flows, go into Net Present Value. So we’re expecting to get something like 2.67 as our Payback Period. And since there’sħ5 in this third period, we need 50 of that, which is two-thirds. If we get back 100 there, we’ve got 50 to go. So, what we want to do here conceptually is say, “With Payback Period, how long does it take to get back $175?” If we get back 25 there, we have to get back 150. It ignores the time value of money, and it ignores any cash flows beyond however many years it takes to get the original investment paid back. This is a measure of liquidity…how long does it take to get back the initial investment? Now, another calculation that we can do here is the Payback Period and Discounted Payback Period. Once you’re in that cash flow mode, press the IRR key and then COMPUTE and find out that the internal rate of return here is 15.067%. As a matter of fact, if you put those in, you don’t have to do this again because those cash flows are already entered in there. Initial outlay 175 and positive cash flows after that 25, 175, and 50.Īs far as entering those, this is exactly the same as what I showed you before. Positive Net Present Value when we use 10%. Our internal rate of return should be higher than that 10% because we had a So clearly, in order to get to a zero Net Present Value, we’re going to have to increase that. We had a positive Net Present Value at a discount rate of 10%. So, clearing this off, we’ll see we’ve got four to enter, so let’s go through that entering procedure. And this wouldĪctually be cash flow 3 because that’s the third different cash flow out here beyond CF0, our -175. And then we’d say the frequency of cash flow 2 is 2 because there’s 2 of these $100 payments in a row. So this would be cash flow 1, and this would be cash flow 2. Say that this cash flow was $100 instead of $75. So here, we’re going to have to enter in 1, 2, 3, and 4 because they’re all different. Now, one thing about entering these cash flow keys is we’re going to tell it how many of these in a row there are. So we need to enter these expected cash flows. There we had a payment, but it had to be the same payment every period. We talked about using the time value of money keys.
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