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HP 17bII+ Net Present Value and Internal Rate of Return
And remember what the net present value means. It is a measure of whether you have overpaid or underpaid for an asset when
compared to what it is worth. The positive $1,382. (rounded) means you have paid below value by this amount. You got a bargain!
RELATING NPV TO IRR:
Do you see the net present value’s relationship with the internal rate of return? You can draw certain conclusions from one about the
other.
Positive Net Present Value
A positive net present value, again, means you paid less for the property than it is worth. Well, if you did that and still got the returns
that were projected, your money is working harder for you than represented by the discount rate.
Look at our cash flows here. When they were discounted at 12%, we got a value of $11,382. That’s what the cash flows are worth.
If you paid $11,382. for an asset and got these returns, you would be earning 12% per period on your $11,382.
But we plugged in a purchase price of $10,000. and put in the same cash flows for the returns. So, what we are saying is that our
$10,000., a smaller amount of money than the $11,382., can earn the same returns. The rate of return on the $10,000. is going to be
higher than the 12% discount rate we used to value the asset at $11,382.
Our $10,000. is getting a better rate of return. It is doing a better job because, although less than the $11,382., it is earning the same
dollars. Hence, its rate of return is higher.
Do you see what we are getting at? A net present value that is positive means the internal rate of return will exceed the discount
rate.
Negative Net Present Value
On the other hand, if we overpaid for the property, the net present value is going to be negative. With a purchase price of, let's say,
$12,000., the net present value is:
$11,382. present value
- 12,000. purchase price
- 618. net present value
What is the internal rate of return going to be in comparison to the discount rate? It is going to be less than the discount rate, isn’t it?
When we overpay, we are paying more money for the asset than we should, more than it is worth.
Discounting the returns at 12% yields a value of $11,382. That says that paying $11,382. for the asset and getting those cash flows
is a 12% return on our purchase price. Well, if we pay more than $11,382. (a negative net present value!) and still get the same
returns, our money is not working so well for us, it is earning less than 12%.
Get back to the cash flow menu from the calculation menu by pressing 'EXIT.' After you have cleared it, put in:
12000
+/-
INPUT
hp calculators - 5 - HP 17bII+ Net Present Value and Internal Rate of Return