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Calculating IRR, NPV, and NFV for Monthly Cash Flows
A real estate investor wishes to purchase/finance a piece of property
for $225,000. She’d like a return of 10% and expects to sell it after
five years for $275,000. She expects the monthly cash flows below.
Find the IRR, NPV and NFV, and determine whether this investment
is desirable.
Note: since payments are expected to be received
monthly
, you will need to set your
Payments per Year to 12.
Monthly Cash Flows
Year 1
$1,000
Year 2
$1,100
Year 3*
$1,200
Year 4*
$1,200
Year 5
$275,000
STEPS
KEYSTROKES
DISPLAY
Clear cash flow register
s 6
“CF Cleared” 0.00
Enter payments per year
1 2 s ÷
12.00
Enter initial investment (as a negative entry
indicating a cash outlay)
2 2 5 ) s – c
C-0 -225,000.00
Enter 1st Cash Flow value
1 ) c
C-1 1,000.00
Enter 1st Cash Flow
frequency
1 2 s c
F-1 12.00
Enter 2nd Cash Flow value
1 1 0 0 c
C-2 1,100.00
Enter 2nd Cash Flow
frequency
1 2 s c
F-2 12.00
Enter 3rd Cash Flow value
1 2 0 0 c
C-3 1,200.00
Enter 3rd Cash Flow
frequency*
2 4 s c
F-3 24.00
Enter final (4th) Cash Flow
2 7 5 ) c
C-4 275,000.00
Find the IRR
R
10.26%
Enter the desired rate of return
and calculate NPV
1 0 s R
“run” 2,127.07
Find the NFV
R
3,194.37
Re-display the desired
rate of return
R
10.00%
*Because the amount of monthly rent for Years 3 and 4 remains the same, this Cash
Flow amount is entered once (C-3), and the frequency for this Cash Flow is set to 24,
indicating that this amount is received for two years, or 24 total payments.
Analysis: This investment would bring an internal rate of return
of 10.26%. The NPV is over $2,000, resulting in a positive return
on investment.
— DO NOT CLEAR CASH FLOWS —
(Cont’d)
