calculation-reference

NPV and IRR Calculations for CFA Level I

Capital budgeting guide for net present value, internal rate of return, and BA II Plus cash flow worksheet inputs.

TL;DR

NPV discounts cash flows at the required return and measures value added. IRR is the discount rate that sets NPV to zero. For mutually exclusive projects, NPV is usually the decision rule to trust.

Formula Reference

NPV

NPV = sum[CF_t / (1 + r)^t] - initial investment

Accept independent projects with positive NPV.

IRR

0 = sum[CF_t / (1 + IRR)^t]

IRR can be misleading with non-normal cash flows.

BA II Plus Keystrokes

CF 2nd CLR WORK
Enter CF0 as the initial investment, usually negative
Enter each Cnn cash flow and Fnn frequency
NPV; enter I; CPT
IRR; CPT

Worked Example

Problem: CF0 = -100,000; C01 = 30,000; C02 = 40,000; C03 = 50,000; discount rate = 10 percent.
NPV is about $2,407.81.
IRR is about 12.04 percent.

Common Mistakes

Entering the initial investment as positive.
Skipping frequency fields when repeated cash flows exist.
Choosing IRR over NPV for mutually exclusive projects with scale differences.

Related Guides

BA II Plus: NPV Calculation Step by Step - Exact BA II Plus keystrokes for net present value with a worked capital budgeting example.
BA II Plus: IRR Calculation Step by Step - Exact BA II Plus workflow for calculating IRR from uneven project cash flows.
Time Value of Money Calculations on the BA II Plus - CFA Level I TVM reference for present value, future value, annuities, perpetuities, and BA II Plus inputs.