- CFA Exams
- CFA Exam: Level I 2021
- Study Session 10. Corporate Finance (1)
- Reading 32. Capital Budgeting
- Subject 5. Comparison of the NPV and IRR Methods

###
**CFA Practice Question**

Martin Computers is analyzing a project with the following cash flows:

B. -17,432; Reject

C. 77,000; Accept

CF

_{0}= -256,000; CF_{1}= 56,000; CF_{2}= 85,000; CF_{3}= 125,000; CF_{4}= 67,000Martin's cost of funds is 14% for such a project. What is the NPV of the project? Should Martin accept it?

A. 17,423; Accept

B. -17,432; Reject

C. 77,000; Accept

Correct Answer: B

The NPV of a project is the sum of all its discounted cash flows. Enter the cash flows into a financial calculator and solve for NPV. Do not forget to enter outflows as negative cash flows. On this basis, NPV @ 14% = -17,432. Negative NPV projects should be rejected.

###
**User Contributed Comments**
15

User |
Comment |
---|---|

orchid |
how do i solve for NPV with BaII TI? |

0is4eva |
On the HP12C: CF0 := -256000, CFj := 56000, CFj := 85000, CFj := 125000, CFj := 67000 (CFj entered four times --> n := 4) i := 14 Press <f><NPV> to calculate NPV. |

Nathan |
on the TI BAII Plus... [CF] 2nd [CLR Work] CFo = 256,000 [+/-], [ENTER], [down arrow] C01 = 56,000, [down arrow], [down arrow] C02 = 85,000, [down arrow], [down arrow] C03 = 125,000, [down arrow], [down arrow] C04 = 67,000, [down arrow], [down arrow] [CPT] [NPV] 14 [ENTER] {ie. I = 14} [down arrow] [CPT] result ==> NPV = -17,431.63495 |

Kapil |
can someone elaborate how NPV is calculated ? |

smillis |
Kapil -- i assume beyond the calculation above. NPV is a combination of combining how much is being spent to how much is being earned, discounted by time. In this problem, 256,000 is spent at the begining, generating the cashflows. The question is whether those cashflows, discounted to today, will be greater or less than that cost. 256,000 (spend now) versus 56,000/(1.14)^1 + 85,000(1.14)^2 + 125,000(1.14)^3 + 67,000/(1.14)^4 = 238,568 (receive, discounted to today) Highly recommend using your calculator... |

Farina |
Does anyone know how to remove old entries from the CF registers on the BAII+? I've got old, uneven CF data in there, over a 5-year tenor. To solve this, all I can do is set Cf5=0, which grossly distorts the negative NPV figure. I've tried 2nd[CLR TVM] and 2nd [CLR WORK] but nothing's worked. Any suggestions? |

bikegeek |
Farina- Just tested on my own as well, go to CF function and hit 2nd clr work for each field that has a value, that should take care of it also |

SriSri |
I was getting +77,000 So accepted! And I was using BAii Cal missing a one key-stroke its interesting. This is how I ended up: 2nd QUIT [CF] 2nd [CLR Work] CFo = 256,000 [+/-], [ENTER], [down arrow] C01 = 56,000, [Enter], [down arrow] C02 = 85,000, [Enter], [down arrow] C03 = 125,000, [Enter], [down arrow] C04 = 67,000, [Enter], [down arrow] [CPT] [NPV] 14 [ I fogot to pressEnter here ] {ie. I = 14} [down arrow] [CPT] result ==> NPV = 77,000 Answer conatians this, to catch you if u fall into this category, as we are in a hurry we will defintely fall here. :) |

hero2607 |
thanks Nathan |

harpalani |
Another perspective: IRR comes 10.82% which is less than 14% cost of capital, hence rejected. |

nabilhjeily |
im using the simulator of hp 12 c classic and all i get is the answer -381.3955 can any body tell me why? |

nabilhjeily |
ok guys i figured it out on the simulator : hp12c always start by clearing memory (f) (fin) (f) (reg) 256000 (chs) (g) (cf0) 56000 (g) ( cfj).... 14 (i) (f) (npv)...result -17,431... |

bidisha |
@ farina: also you can do 2nd reset enter to clear all the CF fields simultaneously rather than one by one |

chipster |
I don't think this question is fair. They do not give you the formula for NPV in the study notes NPV = E CF1/(1+r)t |

bfeitosa |
BA II After finding NPV, press IRR [ENTER]. It's useful to compare the IRR with WACC for second rule verification. If it is less than WACC, good chances your answer is correct on the first rule. |