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HP 17bII+ Discounting & Discounted Cash Flow Analysis
value as a negative) and at the end of ten years you would have $40,000. (in future value as a positive). That is, the $40,000. ten
years from now and the $18,528. today are equal in value but separated by time, under the conditions given in this example of 8%
annual discounting and a 10-year time span.
You probably feel more comfortable with compounding. That is starting with a given sum and letting it grow in the future as it
accumulates interest. We are all used to this concept. Well, discounting is the same thing but done in the opposite chronological
direction. Compounding is starting with a present sum and watching it grow in the future. Discounting is the time reverse, starting
with a given future sum and bringing it back to a present value.
Try taking that $18,528. that we calculated above and compound it forward in time under the same conditions as we discounted the
$40,000.. Keystrokes for this would be:
18527.74
PV
10
N
8
I%YR
FV Answer: $40,000.00
Discounting and compounding are doing the same thing, just in opposite time directions of one another. Relating discounting to
compounding this way may make it easier for you to grasp the concept of discounting.
DISCOUNTING A SERIES OF SUMS:
Remember, if the sums are the same, we can use the five financial registers, putting that sum into the PMT register. But, if they are
different, we must use discounted cash flow. We also must use discounted cash flow if the sums are not equally spaced apart,
regardless of whether or not the sums are the same each time.
From the main menu press ‘FIN’ and then press ‘CFLO’ to get to the discounted cash flow menu. Here we will work out the present
value of a series of sums. First, let’s get the present value of the projected incomes described below:
Estimated cash flow at the end of period 1: $30,000.
period 2: $35,000.
period 3: $50,000.
Money received at the end of a period is called an "ordinary annuity." We'll talk more about this later when we contrast it with an
"annuity-payable-in-advance."
The Discount Rate
You are at the beginning of the first period and you are estimating that your incomes or an asset producing incomes will be those
shown above. What is the value today - the present value - of these future benefits? Before we can discount them to a present
value, we must decide upon the rate at which we are going to discount. This rate should reflect the rate of return you think you
could earn today on an investment (remember the relationship between compounding and discounting). It should also reflect the
risk, the degree of uncertainty concerning whether or not you will really earn those funds as projected. Let’s use 10%.
Entering the Flows
In your cash flow menu if it has been cleared you should see “FLOW(0)=?,” which refers to the purchase price for an asset. If it has
not been cleared, press in 'SK,' the shift key, and 'CLR DATA.' The calculator will ask you: "CLEAR THE LIST?" Press 'YES' and
that will bring you to "FLOW(0)=?" in the display.
hp calculators - 3 - HP 17bII+ Discounting & Discounted Cash Flow Analysis
