HP 12C User manual

hp calculators
HP 12C Internal Rate of Return
Cash flow and IRR calculations
Cash flow diagrams
The HP12C cash flow approach
Practice with solving cash flow problems related to IRR
How to modify cash flow entries

hp calculators
HP 12C Internal Rate of Return
hp calculators - 2 - HP 12C Internal Rate of Return - Version 1.0
Cash Flow and IRR calculations
Cash flow analysis is an extension of the basic TVM concepts applied to compound interest problems when payments
occur in regular periods and do not have the same value. Any financial investment can be represented as an initial
investment of money and a series of later cash flows that occur in regular periods of time. Each flow of money can be
positive (received) or negative (paid out) and considered as a cash flow. Common cash flow problems usually involve the
calculation of the Internal Rate of Return (IRR) or the Net Present Value (NPV).
The NPV expresses the amount of money resulting from the summation of the initial investment (CF0) and the present
value of each anticipated cash flow (CFj) calculated to the time of the initial investment. The IRR is the discounted rate
applied to all future cash flows that cause NPV = 0.
The expression that calculates the Internal Rate of Return is:
()
()
nj
nj
k
j
jIRR
IRR
IRR
CFCF −
−
=
+×







+−
×+= ∑1
11
0
1
0Figure 1
Cash flow diagrams
The cash flow diagram in Figure 1 illustrates one of the many possible situations that can be handled by the HP12C.
Figure 2
The HP12C cash flow approach
In the HP12C each cash flow amount is stored in its corresponding register in memory. For each cash flow amount there
is a related register to store the number of consecutive occurrences of this amount. This approach is shown below:
Registers Cash flow Nj
R0CF0N0
R1CF1N1
... ... ...
R6CF6N6
R7CF7N7
... ... ...
R.8 CF18 N18
R.9 CF19 N19
FV CF20 N20
gJ Initial Cash Flow
gK Last Cash Flow
gK Intermediate Cash Flow
ga Number of consecutive occurrences of CFj
Composition Period
Figure 3

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HP 12C Internal Rate of Return
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The HP12C memory organization allows up to 20 different cash flow amounts plus the initial investment to be stored and
handled according to the diagram in Figure 2. If any cash flow amount repeats consecutively, then it can be stored as a
grouped cash flow CFjand its corresponding Njholds the number of occurrences, up to 99. TVM register nis used as an
index to control CF operations.
The keys to enter cash flow data are:
gJ - stores the number in the display in R0and sets nto zero
gK - adds 1 unit to current ncontents (j) and then stores the number in the display in Rj
ga - stores the number in the display(∗)in Nj; ncontents (j) are not changed
(∗) The number in the display must be a positive integer from 1 to 99, otherwise ga returns to the display and
no operation is performed.
If the last available register has already been used, gK adds 1 unit to current ncontents and stores the number in
the display in TVM register FV. Any attempt to add a cash flow amount with gK after FV has already been used
or when ncontents refer to a register that is not available causes to be shown in the display and no
operation is performed.
Practice solving IRR problems
Example 1: The cash flow diagram below represents a possible investment and you were chosen to determine if it is
feasible. The success of this investment dictates your future in the company, so the analysis must be
precise and error free. What is the correct keystroke sequence to fill the HP12C registers with all data?
Figure 4
Solution: Clearing all registers is not necessary to start cash flow analysis because only the registers updated with
cash flow data are used.
130000 Þ gJ
7000 gK
10000 Þ gK
Figure 5
$-130,000.00
CF0
$ 7,000.00
CF1
$-10,000.00
CF2
$ 20,000.00
CF3
3 consecutive occurrences
N3
$ 12,000.00
CF4
$-8,000.00
CF5
$ 178,500.00
CF6

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HP 12C Internal Rate of Return
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The next cash flow amount occurs three times in a sequence, so it can be entered as a grouped cash flow.
20000 gK
3 ga
Figure 6
The remaining data is entered with the following keystroke sequence:
12000 gK
8000 Þ gK
178500 gK
Figure 7
Answer: The keystrokes presented above indicate the correct entries.
Example 2: The cash flow diagram had all of its information used to compose the cash flow data in the HP12C
memory. Show how to check that they were entered correctly.
Solution: Now that all data is entered, checking for its correctness is possible in two ways. The most common way is
the sequential check and the keystroke sequence for this checking is as follows:
:w
Figure 8
This is the number of the last register used to store the cash flow data. It will be needed later.
:gK
Figure 9
This is the amount of CF6. The sequential checking works backwards, and each time :gK is
pressed, nis decreased by one unit. Now check CF5, CF4and when checking CF3verify N3as well.
:gK
:gK
:ga
Figure 10

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HP 12C Internal Rate of Return
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This is the N3value. Whenever Njneeds to be checked, it must be recalled first. Now check the CF3value:
:gK
Figure 11
Continue checking CF2, CF1and stop when CF0is shown in the display.
:gK
:gK
:gK
Figure 12
Recall ncontents to the display:
:w
Figure 13
Answer: The entries are correct.
Example 3: The investment is considered attractive if it shows at least 8% of internal rate of return. Calculate the IRR.
Solution: To perform either IRR or NPV calculations, nmust have its contents restored to the correct value:
6 w fL
(flashing)
Figure 14
Answer: Yes, the investment is attractive based on its 9.37% internal rate of return.
How to modify cash flow entries
If it happens that a cash flow entry was wrongly entered, modifying its amount is not difficult and there is no need to
enter all data again. In fact there are two ways for doing this.

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HP 12C Internal Rate of Return
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Example 4: Update the amount of CF2for $-9,500.00 and compute the new IRR after this change.
Solution 1: Type in the correct amount and store it in R2:
9500 Þ ?2 fL
Figure 15
Solution 2: Set nregister to (j-1), type in the correct amount, press gK, then restore nprior to compute IRR:
1n 9500 Þ gK 6n fL
Figure 16
Answer: The investment is still attractive based on revised IRR of 9.42%.
To modify a wrongly entered Nj, it is necessary to change the value stored in the register n.
Example 5: Now change both N3and N4to 2 and calculate the IRR again. The cash flow diagram now looks like this:
Figure 17
Solution: For each correction, set nto match j, type in the correct Njand press ga. After all corrections, set nto
its original value and press fL.
3n 2 ga 4n 2 ga 6 n fL
Figure 18
Answer: The newly computed IRR is 8.77%.
$-130,000.00
CF0
$ 7,000.00
CF1
$-9,500.00
CF2
$ 20,000.00
CF3
2 consecutive occurrences
N3
$ 12,000.00
CF4
$-8,000.00
CF5
$ 178,500.00
CF6
2 consecutive occurrences
N4