eneral Motors has struggled in recent years. Its ice in mid-2002 was around $50 2 share, which was ie wee it stod sx years earlier. GM's earings per share pave punged fom $8.53 2 share in 1999 0 $1.77 a share in fon, and the company hasnt increased its dividend since toa. Moreover the company continues tobe plagued by high vets and a bureaucratic system that has limited its ability to develop innovative products. not surprisingly, GM's executives (and shareholders!) are teoking for ways to improve the company’s financial and oper- ating performance. There are some reasons for optimism. The companys CEO, Rick Wagoner, has taken a number of steps to inprove performance. Most notably, Wagoner has brought on two well-respected veterans from the auto industry to turn things around. He hired Bob Lutz, 2 70-year-old retired Chnjler executive, to help with product designgand John Devine, an ex-Ford executive, to help improve the company’s financial performance. ‘There are signs that the worlds largest automotive company is starting to find the road to success. GM's earnings and mar- fet share are beginning to turn around, and the company is, once again attracting some positive attention on Wall Street. GM's stock, which was trading under $40 a share following the terrorist attacks in September 2001, soared to nearly $70 a share in spring 2002. More recently, however, the sharp decline in the overall stock market has once again pushed GM's stock below $40 a share. As it tries to tum things around, GM's new leadership team has paid particular attention to the company/s capital budget- GENERAL MOTORS STRIVES TO FIND THE ROAD TO SUCCESS GENERATE MOTORS ing practices. Indeed, it is clear that the Wagoner-Lutz-Devine team has taken another look at many of the company's previ- ously planned projects. GM's current capital budget is fore- casted to be 10 percent less than the $7.8 billion that was spent in 2001. But it is also clear that GM's leaders are not im- posing these cuts across the board. In some areas the company is increasing its investments, while in other areas it is scaling back. For example, the company is backing away from its pre~ vious plans to aggressively develop new hybrid vehicles that blend elements of a minivan and a sports utility vehicle. While it may be too early to tell whether GM's initiatives will ultimately enhance shareholder value, it is clear that the capital investment decisions that the company makes today will have a long-lasting effect on the company’s performance. In the years ahead, each of GM's investments will require care- ful analysis, much of it based on the techniques described in this chapter. With this in mind, as you read this chapter, think about how companies such as GM use capital budgeting analy- sis to make better investment decisions. Source: Gregory L. White, “Sharing the Wheel: GM's New Team Undoes Plans Young CEO Once Had Pushed,” The Woll Street Joumal, June 28, 2002, Al. 389Capital Budgeting “The process of planning expenditures on assets whore cash flows are expected to extend beyond one year. PERSPECTIVE sed the cost of capital. Now we turn to investment deg, In the last chapter, we discu sions involving fived assets, or copital budgeting. Here the term copital refers to long, term assets used in production, while 2 budget is a plan that details projected infioys and outflovs during some future period. Thus, the capital budget is an outline of planned investments in fixed assets, and capital budgeting is the whole process of ap, fing which ones to include in the capital budget. m alyzing projects and de IMPORTANCE OF CAPITAL BUDGETING _ ‘A number of factors combine to make capital budgeting perhaps the most important function financial managers and their staffs must perform. First, since the results of capital budgeting decisions continue for man s, the firm loses some of its flexi- bility. For example, the purchase of an asset with an economic life of 10 years “locks in” the firm for a 10-year period. Further, because asset expansion is based on ex- pected future sales, a decision to buy an asset that is expected to last 10 years re- quires a 10-year sales forecast. Finally, a firm’s capital budgeting decisions define its strategic direction, because moves into new products, services, or markets must be preceded by capital expenditures. ‘An erroneous forecast of asset requirements can have serious consequences. If the firm invests too much, it will incur unnecessarily high depreciation and other ex- penses. On the other hand, if it does not invest enough, two problems may arise. First its equipment and computer software may not be sufficiently modern to enable it to produce competitively. Second, if it has inadequate capacity, it may lose market share to rival firms, and regaining lost customers requires heavy selling expenses, price reductions, or product improvements, all of which are costly. _ Timing is also important—capital assets must be available when they are needed. Edward Ford, executive vice-president of Western Design, a decorative tile company, gave the authors an illustration of the importance of capital budgeting. His firm tried to operate near capacity most of the time. During a four-year period, Western expe- Fenced intermittent spurts in the demand for its products, which forced it to cum away orders. After these sharp increases in demand, Western would add capacity by See eee then purchasing and installing the appropriate eau then demand had dri iW to cigl pmenihe to get the additional capacity ready, hfe 7 ea aerae re firms with available capacity had already pe plan its capacity renantket; Once Western began to properly forecast demand and tren ine ay feituitements a year or so in advance, it was able to maintain an ‘ease its market share, aes Te etn ean improve both the ming and the quay ofa anu install the assets before they sane co epial assets in advance, i ean purcheet capital gous unt existing asseu are eee eo oreanately many firms do no ee ¥ assets are approaching full-capacity usage. If sales increasPiéscBusness Plan me i that fa terms the eect for the tea years, *t demand, all firms in the industry will tend times for machinery, a deterioration inthe seal of he ears long wating ry ein oy oe ene a ils ean avoid these problems. Note though thet fe fee bene e dernand an then expands vo meet the antijaed demons Soran de jncrease, it will be saddled with excess capacity and high Se aoa loses xen bankrupt Tit, noussheeia ee capital budgeting typically involves substanti it i Ne Ne emcee it mnet tame te hat Inet ape rere carey are not available automatically, Therefore, a firm contemplating 2 major capital expenditure program should plan its financing fa hile ateines is Be sare funds are availble, Ce eee SELF-TEST QUESTIONS Why are capital budgeting decisions so important? Why is the sales forecast a key element in a capital budgeting decision? GENERATING-LDEASALOA GAMBIA PROIECTS “The same yeneral concepts that are used in security valuation are also involved in cap- ital budgeting, However, whereasa set of stocks and bonds exssin the securities mar- tet and investors select from this set, capital budgeting projects ae created bythe firm. For ormple a sales representative may report that custome are asking fora pardular product that the company does not now produce. The sales manager then discusses areca wit the marketing research group to determine the sie ofthe market for the A If it appears that a significant market does exis, cost accountants pra engineers will be asked to estimate production costs. If they conclude that the product can be produced and soldat a suficent profit the project will be undertaken. Nigam’ growth, and even its ability to remain competitive and o survives depends aaa ow of ideas for new products, for ways to make existing products bet- ter, and for ways to operate at a lower cost Accordingly, a well-managed firm will go to great lengths to develop good capital budgeting proposals. For example, the exec- tive vice-president of one very successful corporation indicated that his company takes the following steps to generate projects: because of an increase in general marker to order capital goods at about the sam proposed product ew products and for ways to improve ex- ee, which consists of senior executives in constantly searching for n ising products. In addition, our executive commit enor marketing, production, and finance, identifies che products and markets in which our eom- pany should compete, and the committees long-run targets for exch division, ‘These tar- pete, which are spelled out inthe corporations ‘arategi business pln, provide @ gener tguide to the operating execurives ‘cho must meet them. The operating executives then seek ew products, se expansion plans for exist products, and ook for ways edace Bro aoe rnd distribution cos Since bonuses and promctert are based on each uni abil- ity to meet or exceed its targets: these economic incentives encOUrage UF operating exec- wee to seek out profitable investment OppOrminia=s Our R&D department k CAPITAL PROJECTS GENERATING IDEAS FO!While our senior executives ae judge and rewarded on the bass of how wet perform, people further down the line ae given bonuses and stock options for Ung, that lead to profitable investments, Additionally, a percentage of our corporate py eon, aside for distribution to nonexecutive employees, and we have an Employees? seq pte ship Plan (ESOP) to provide further incentives. Our objective is to encourage eny ope all levels to keep an eye out for good ideas, including those that lead to capital invesomce a . Ifa frm has capable and imaginative executives and employees, and if ts cen system is working propery, many ides fr capita investment will be advanced ideas will be good ones, but others will not. Therefore, procedures must be — lished for screening projects, the primary topic of this chapter. tab. SELF-TEST QUESTION What are some ways firms get ideas for capital projects? PROJECT CLASSIFICATIONS ___ = Analyzing capital expenditure proposals is not a costless operation—benefits can be gained, but analysis does have a cost. For certain types of projects, a relatively de, tailed analysis may be warranted; for others, simpler procedures should be used. Ac. cordingly, firms generally categorize projects and then analyze those in each category somewhat differently: 1, Replacement: maintenance of business. One category consists of expendi- tures to replace worn-out or damaged equipment used in the production of profitable products. Replacement projects are necessary if the firm is to con. tinue in business. The only issues here are (a) should this operation be contin. ued and (b) should we continue to use the same production processes? The an- swers are usually yes, so maintenance decisions are normally made without going through an elaborate decision process. 2, Replacement: cost reduction. This category includes expenditures to replace serviceable but obsolete equipment. ‘The purpose here is to lower the costs of labor, materials, and other inputs such as electricity. These decisions are dis- cretionary, and a fairly detailed analysis is generally required. 3. Expansion of existing products or markets. Expenditures to increase output of existing products, or to expand retail outlets or distribution facilities in mar- kets now being served, are included here. These decisions are more complex because they require an explicit forecast of growth in demand. Mistakes are more likely, so a more detailed analysis is required. Also, the go/no-go decision is generally made at a higher level within the firm. 4. Expansion into new products or markets. These are investments to produce 4 new product or to expand into a geographic area not currently being served. These projects involve strategic decisions that could change the fundamental nature of the business, and they normally require the expenditure of large sums 392 | cHarren 10» THE BASICS OF CAPITAL BUDGETINGinl ton ey mea te amis ind asa part of the firm’ strate; oh oe the very top—by the board of directors . Safety and/or enviror 5 a ee arernrnens ntfonmental projects. Expenditures necessary to comply > Ceara labor agreements, or insurance policy terms fall into this category: These expenditures are called mandatory investment, and they pargeijas pupae! projects. How they are handled depends on apes ing treated much like the Category 1 projects de- 6, Other. This catch-all includes office buildings, and so on. How they are handled varies ace parking lots, executive aircraft, companies. In ee See simple calculations, and only a few supporting documents, are req for replacement decisions, especially maintenance-type investments in profitable plants. A more detailed analysis is required for cost-teduction replace- ments, for expansion of existing product lines, and especially for investments in new products or areas, Also, within each category projects are broken down by their dol- Jar costs: Larger investments require increasingly detailed analysis and approval at a higher level within the firm. Thus, whereas a plant manager may be authorized to / approve maintenance expenditures up to $10,000 on the basis of a relatively unso- phisticated analysis, the full board of directors may have to approve decisions that in- volve either amounts over $1 million or expansions into new products or markets. Statistical data are generally lacking for new-product decisions, so here judgments, as opposed to detailed cost data, are especially important. ‘Note that the term “assets” encompasses more than buildings and equipment. ‘Computer software that a firm develops to help it buy supplies and materials more efficiently, or to communicate with customers, is also an asset. So is a customer base like that of AOL developed by sending out millions of free CDs to potential cus- tomers. And so is the design of a new computer chip, airplane, or movie. All of these are “intangible” as opposed to “tangible” assets, but decisions to invest in them are analyzed in the same way as decisions related to tangible assets. Keep this in mind as you go through the remainder of the chapter. SELF-TEST QUESTION Identify the major project classification categories, and explain how they are used. SIMILARITIES BETWEEN CAPITAL BUDGETING D SECURITY VALUATLO. Once # potential capital budgeting project has been identified is evaluation involves the same steps that are used in security analysis: ct must be determined. This is similar to finding the stock or bond. a ected cash flows from the project, includ the exp rend of its expected life. This is similar 41, First, the cost of the projes price that must be paid for a 2. Next, management estimates ing the salvage value of the asset at rY VALUATION SIMILARITIES BETWEEN CAPITAL BUDGETING AND SECURIT)4 CHAPTER 10 ; oe to estimating the future dividend or interest payment stream on q nt bond, along with the stock’ expected sales price or the bond's maruri ia or cash flows must be estimated, This ew" tribution (riskiness) of the cash fone 3. Third, the riskiness of the projected information about the probability i ject’s riski determines the 4. Given the projects riskiness, management RO ety which the cash flows should be discounted. ital ap i a value basis to obtai 5, Nest, the expected cash inflows are put on a present val ook, timate of the asset$ value. This is equivalent to finding the present valyerge™ stocks expected future dividends. 7 . Finally, the present value of the expected cash inflows is compared with the ry, quired outlay. If the PV of the cash flows exceeds the cost, the project shouly Otherwise, it should be rejected. (Alternatively, if the e be accepted. : ! ' rate of | a on the project exceeds its cost of capital, the project is a cnet fan individual investor identifies and invests in a stock or bond whose market prige ig less than its true value, the investor’ wealth will increase. Similarly, if firm ident tifies (or creates) an investment opportunity with a present value greater than its cose * the value of the firm will increase. Thus, there is a direct link between capital bud. geting and stock values: The more effective the firm's capital budgeting procedures, the higher its stock price. SELF-TEST QUESTION List the six steps in the capital budgeting process, and compare them with the steps in security valuation. Five key methods are used to rank projects and to decide whether or not they should be accepted for inclusion in the capital budget: (1) payback, (2) discounted payback, G3) net present value (NPV), (4) internal rate of return (IRR), and (5) modified internal rate of return (MIRR). We will explain how each ranking criterion is caleu- lated, and then we will evaluate how well each performs in terms of identifying those projects that will maximize the firm's stock price. We use the cash flow data shown in Figure 10-1 for Projects $ and L to illustrate each method. Also, we assume that the projects are equally risky. Note that the cash flows, CF,, are expected values, and that they have been adjusted to reflect taxes, de- preciation, and salvage values. Further, since many projects require an investment in both fixed assets and working capital, the investment outlays shown as CFp include any necessary changes in net operating working capital.' Finally, we assume that all cash flows occur at the end of the designated year. Incidentally, the S stands for skort ' The most difficult part of the capital budget i want cash flows. For sist P: 1 budgeting process is estimating the relevant cash flow: Se apt plicity, the net cash flows are treated as a given in this chapter, which allows us to focus on (footnote continues) THE BASICS OF CAPITAL BUDGETINGpayback Period Thelength of time required for an investment's net revenues to cover its cost. EXPECTED AFTER-TAX NET CASH FLOWS, YEAR (t) PROJECTS o ($1,000) 1 500 2 400 3 300 4 100 0 1 2 3 4 0 Project L: et te ek 1,000 100 300 © 400-600 "Cfo represents the net investment outlay or initial cost. and the L for long: Project $ is a short-term project in the sense that its cash inflows come in sooner than Ls. PayBack PERIOD ‘The payback period, defined as the expected number of years required to recover the original investment, was the first formal method used to evaluate capital budget- ing projects. The payback calculation is diagrammed in Figure 10-2 and it is ex- plained below for Project S. 1, Enter CF) = ~1000 in your calculator. (You do not need to use the cash flow register; just have your display show ~1,000.) 2. Now add CF, = 500 to find the cumulative cash flow at the end of Year 1. The result is —500. 3. Now add CF, is 100. 4, Now add CF; = 300 to find the cumulative cash flow at the end of Year 3. This is +200. 5. We see that by the end of Year 3 the cumulative inflows have more than re- covered the initial outflow. Thus, the payback occurred during the third year. = 400 to find the cumulative cash flow at the end of Year 2. This (Footnote 1 continued) _ budgeting decision rules. However, in Chapter 11 we will discuss cashflow estimation in detail. Also, note that working capita is defined as the firms current assets, and that net operating working capital is current assets minus non- interest-bearing liabilities. capiTat supcerine oectston nutes | 395payback Period for Projects S and 1 2 ° ject S: +t tH Fat ay -1000 500 400 to ‘Cumulative NCF 1,000 -500 -100 300 o 1 2 8 4 Project G09 100 ~=«300=«400=—«gO0 Cumulative NCF 1,000 -900 -600 200 400 ee If the $300 of inflows come in evenly during Year 3, then the exact Payback period can be found as follows: Unrecovered cost at start of year Paybacks = Year before full recovery + Cow during year $100 2242 =233y 2+ Bog 7 233 years. Applying the same procedure to Project L, we find Payback, = 3.33 years ‘The shorter the payback period, the better. Therefore, if the firm required a pay. back of three years or less, Project $ would be accepted but Project L would be re- jected. If the projects were mutually exclusive, S would be ranked over L because § Mutually Exclusive Projects has the shorter payback. Mutually exclusive means that if one project is taken on, the Aset of projects where only other must be rejected. For example, the installation of a conveyor-belt system ina ‘one can be accepted. warehouse and the purchase of a fleet of forklifts for the same warehouse would be . . mutually exclusive projects—accepting one implies rejection of the other. Indepen- Independent Projects dent projects are projects whose cash flows are independent of one another. Projects whose cash flows Some firms use a variant of the regular payback, the discounted payback period, = Ey which is similar to the regular payback period except that the expected cash flows are Romocpanceofother _{seounted by the project’ cost of capital. Thus, the discounted payback period is de eae fined as the number of years required to recover the investment from discounted net cash flows. Figure 10-3 contains the discounted net cash flows for Projects $ and L, Discounted Payback assuming both projects have a cost of capital of 10 percent. To construct Figure 10-3, Period each cash inflow is divided by (1 + k)' = (1.10)', where t is the year in which the cash ‘The length of time required flow occurs and k is the projects cost of capital. After three years, Project S will have foran investments cash generated $1,011 in discounted cash inflows. Since the cost is $1,000, the discounted flows, discounted atthe payback is just under three years, or, to be precise, 2 + ($214/$225) = 2.95 years investments cos ofeapta Projet Ls discounted payback is 3.88 years Discounted paybacks = 2.0 + $214/$225 = 2.95 years. Discounted payback, = 3.0 + $360/S410 = 3.88 years. For Projects Sand L, the rankings are the same regardless of which payback method een iat is Project S is preferred to Project L, and Project $ would stil be te a if the firm were to require a discounted payback of three years or less. Ofte None ne Fegular and the discounted paybacks produce conflicting rankings. flows vod at the payback is a type of “breakeven” calculation in the sense that ifeast me in at the expected rate until the payback year, then the project will bre CHAPTER 10 THE SICS OF CAPITAL BUDGETINGNet Present Value (NPV) Method Amethod of ranking invesenent proposals using the NPV, which is equal to the present value of future ret eash lows, discounted atthe cost of capital. 0 1 2 3 4 Project S: ++} 4, Net cash tlow 1,000 00 400 300100 Discounted NCF (at 10%) 1,000 455 a1 205 8 Cumulative discounted NCF -1,000 -545 -214 11,79 0 1 es Project L: +++, Not cash flow 1,000 100 900 400600 Discounted NCF (at 10%) -1,000 9124830110 Cumulative discounted NCF -1,000 -909 661 -360 50 even, However, the regular payback does not consider the cost of capital—no cost for the debt or equity used to undertake the project is reflected in the cash flows or the calculation, ‘The discounted payback does consider capital costs—it shows the breakeven year after covering debt and equity costs. ‘An important drawback of both the payback and discounted payback methods is that they ignore cash flows that are paid or received after the payback period. For ex- ample, consider two projects, X and Y, each of which requires an up-front cash out- flow of $3,000, so CF, = ~$3,000. Assume that both projects have a cost of capital of 10 percent. Project X is expected to produce cash inflows of $1,000 each of the next four years, while Project Y will produce no cash flows the first four years but then generate a cash inflow of $1,000,000 five years from now. Common sense sug- gests that Project Y creates more value for the firm’ shareholders, yet its payback and discounted payback make it look worse than Project X. Consequently, both payback methods have serious deficiencies. Therefore, we will not dwell on the finer points of payback analysis.? Although the payback method has some serious faults as a ranking criterion, it does provide information on how long funds will be tied up in a project. Thus, the shorter the payback period, other things held constant, the greater the project’ lig- uidity. Aso, since cash flows expected in the distant future are generally riskier than near-term cash flows, the payback is often used as an indicator of a project’ riskiness. Net Present VALUE (NPV) AAs the flaws in the payback were recognized, people began to search for ways to im- prove the effectiveness of project evaluations, One such method is the net present 7 Another capital budgeting technique that was once used widely is the accounting rate of return (ARR), ‘which examines a project’ contribution tothe firm's net income. Although some companies stil calculate an ARR, it rally has no redeeming features, so we will nt discuss it in this text. See Eugene F. Brigham and Phillip R. Daves, Intermediate Financial Management, 7th ed (Cincinnati, OH: South-Western College Publishing, 2002), Chapter 11. Yet another technique that we omit here is the profitability index, or benefit/ ‘ost ratio, Brigham and Daves also discuss this method. CAPITAL BUDGETING DECISION RULES | 397Discounted Cash Flow (DCF) Techniques Methods for ranking investment proposals that 1. Find the present value of employ time value of money concepts. CHAPTER 10 | value (NPV) method, which relies on discounted cash flow (DCF) "alge, “To implement this approach, we proceed as follows: each eas flow, inching both inflows and ou iscounted at the project's cost of capitals 2. Sum these discounted cash flows; this sum is defined as the projects py eoacarievva, the project should be accepted, while if the x7, 3. If the NPV is postive the project stein Oo positive NPVs ate gative, it should be rejected. posi caclusive the one with the higher NPV should be chosen, i‘ ‘mutual, “The equation for the NPV is as follows: (104) Here CF; is the expected net cash flow at Period t, kis the project’ cost of capi and n is its life, Cash outflows (expenditures such as the cost of buying equipment, l, building factories) are treated as negative cash flows. In evaluating Projects $ and | only CF is negative, but for many large projects such as the Alaska Pipeline, an ele tric generating plant, or IBM's laptop computer project, outflows occur for seve years before operations begin and cash flows turn positive. Ata 10 percent cost of capital, Project S's NPV is $78.82: 0 k=10% 1 2 3 A tt pe oS faa ot as | ses | 68.30 Net Present Value 78.82 pepe ae ee ee NPV, = $49.18. On this basis, both projects should En independent, but should be chosen if they are mutually Teis ra a aus the NPV as was done in the time line by using Equation tor. Different clea tor However; itis more efficient to use a financial call of memory called the ach fone Somewhat differently, but they al have a son thowe in rojere Sg flow register” that is used for uneven cash flows such % for Equation inet an, Ls opposed to equal annuity cash flows). A solution process to dois enter the cath fhe Cee med into financial calculators, and all you have FST Atthae poise? a (being sure to observe the signs), along with the value o! » You have (in your calculator) this equation: NPVs = ~1,000 + 500 400, 300, 100 (1.10) (10 * G0 * G10)" *_THE BASICS OF CAPITAL BUDGETINGNotice that the equation has one unknown, NPV, Now, all you need to do is to ask the calculator to solve the equation for you, which you do by pressing the NPV button {and, on some calculators, the “compute” button). The answer, 78.82, will appear on the screen. Most projects last for more than four years, and, as you will see in Chapter 11, most projects require many calculations to develop the estimated cash flows, There. fore, financial analysts generally use spreadsheets when dealing with capital budget- ing projects. See the model for this chapter, 1OMODELals, RATIONALE FOR THE NPV METHOD ‘The rationale for the NPV method is straightforward. An NPV of zero signifies that the project's cash flows are exactly sufficient to repay the invested capital and to pro- vide the required rate of return on that capital. If a project has a positive NPV, then it is generating more cash than is needed to service its debt and to provide the re- quired return to shareholders, and this excess cash accrues solely to the firm's stock- holders. Therefore, if a firm takes on a project with a positive NPV, the position of the stockholders is improved. In our example, shareholders’ wealth would increase by $78.82 if the firm takes on Project S, but by only $49.18 if it takes on Project L. The Technology Supplement that accompanies this text explains this and other commonly used calculator applications. For those who do not have the Supplement, the steps for two popular calculators, the HP- 10BIT and the H1P-17B, are shown below. If you have another type of financial calculator, se its manual ‘or the Supplement. HP-10BI: 41. Clear the memory 2, Enter CF as follows: 1000 ZS) (GH 3. Enter CF; a follows: 500 4, Repeat the process to enter the other eash flows. Note that CF 0, CF 1, and so forth, flash on the screen as you press the [Qj] button. Ifyou hold the button down, CF 0 and so forth, will remain on the screen until you release it. 5. Once the CFs have been entered, enter k = 6. Now that all ofthe inputs have been entered, you can press il $78.82. 7. Ifa cash flow is repeated for several years, you can avoid having to enter the CFs for each year. For example, if the $500 cash flow for Year 1 had also been the CF for Years 2 through 10, making 10 of these $500 cash flows, then afer entering 500 [che frst time, you could enter 10 fl BS): This would automatically enter 10 CFs of 500. to get the answer, NPV = HP-17B: 1. Go tothe cash ow (CFLO) men, clea if FLOW(0 = ? des not par onthe sren 2. Ener CF follows 100 3 Enter CF; s follows: 500 a is for Bex lfllow- 4. Now, the calculator will ask you if the 500 is for Period 1 only or if it is also used for seves inetd Since nly el for Peed, pes SIMD saver “1. Alea you cout Fee TRS nd hen EE co rn of the promt for de remundr of he problem For some pl lems, you will want to use the repeat feature. ee 5, Enter the remaining CFs, being sure to turn off the prompt or else to specify “I” foreach entry. ©. Onethe CFs havea been entered ress [SD an chen UKE. 1, Now enter k = I= 10% as follows: 10 get the anover, NPV = S7882 Now press DGETING DECI L iInternal Rate of Return (IRR) Method Amethod of ranking investment proposals using the rate of return on an investment, calculated by finding the discount rate that equates the present value of future cash inflows to the project's cost. TRR ‘The discount rate that forces the PV of a project’s inflows to equal the PV of its costs. tx Viewed in this manner, itis easy to see why S is preferred to L, and itis a, see the logic of the NPV approach.* 0 easy iy There is also a direct relationship between NPV and EVA (econom; added) NPV is equal to the present value of the project’ future EVAg “Ty "lu accepting positive NPV projects should result in a positive EVA and a possess, (market value added, or the excess of the firm’s market value over its book itive My. 4 reward system that compensates managers for producing positive EVA yi ue), § - So, the use of NPV for making capital budgeting decisions. te I Neag INTERNAL Rate oF RETURN (IRR) In Chapter 7 we presented procedures for finding the yield to matutity, or rate turn, on a bond—if you invest in a bond, hold it to maturity, and receive al art promised cash flows, you will earn the YTM on the money you invested. Enact Pime concepts are employed in capital budgeting when the internal rate of re," (RR) method is used. The IRR is defined as the discount rate that equates the ent value of project’ expected cash inflows to the present value of the project’ cose PV(Inflows) = PVdnvestment costs), or, equivalently, the rate that forces the NPV to equal zero: a cr, ‘ \ vee GE IRR)! (1+ TE RRP? SI y= 9 (102 For our Project §, here is the time line setup: o mR 2 3 ‘ — el Cash Flows ~1,000 500 400 300 100 | Sum ot PVsfor CF,4 1,000 Net Present Value 500, 400, 300 100 (1+IRR) (1 +IRRY | (1+ IRR) (1 + IRR) =1,000 + ‘Thus, we have an equation with one unknown, IRR, and we need to solve for IRR: Without a calculator, you must solve Equation 10-2 by trial-and-error —try some discount rate and see if the equation solves to zero, and if it does not, try a diffe discount rate, and continue until you find the rate that forces the equation to ea’ zero, The discount rate that causes the equation (and the NPV) to equal zero is de sent * This description ofthe proces i somewhat oversimplified. Both analysts and investors anit. Sf firms will identify and accept positive NPV lect these expectations fy and accept post projects, and current stock prices reflect : Tis, stock prices react to announcements of new capital project ony co the extent eat such Pe were not already expected. In this sense, we may think ofa firm's value as consisting of 0 PATE’ ay, value of its existing assets and (2) the value ofits “growth opporcunites," or projects with posivefined as the IRR. For a realistic project with a fairly long life, the trial-and-error ap- proach is a tedious, time-consuming task. Fortunately: itis easy to find IRRs with a financial calculator. You follow proce ures almost identical to those used to find the NPV. First, you enter the cash flows as shown on the preceding time line into the calculator’s cash flow register. In effect, entered the cash flows into the equation shown below the time line. Note that we have one unknown, IRR, which is the discount rate that forces the equation to equal zero. The calculator has been programmed to solve for the IRR, and you ac- tivate this program by pressing the button labeled “IRR.” Then the calculator solves. for IRR and displays it on the screen. Here are the IRRs for Projects $ and L as found with a financial calculator.’ IRRs = 14.5%. IRR, = 11.8%. If both projects have a cost of capital, or hurdle rate, of 10 percent, then the in= ternal rate of return rule indicates that if the projects are independent, both should be accepted—they are both expected to earn more than the cost of the capital needed to finance them, If they are mutually exclusive, $ ranks higher and should be accepted, while L should be rejected. If the cost of capital is above 14.5 percent, both projects should be rejected. Notice that the internal rate of return formula, Equation 10-2, is simply the NPV formula, Equation 10-1, solved for the particular discount rate that forces the NPV to equal zero. Thus, the same basic equation is used for both methods, but in the : c, k, is specified and the NPV is found, whereas in the IRR method the NPV is specified to equal zero, and the interest rate that forces this equality (the IRR) is calculated. Mathematically, the NPV and IRR methods will always lead to the same accept/ reject decisions for independent projects. This occurs because if NPV is positive, IRR must exceed k. However, NPV and IRR can give conflicting rankings for mutually exclusive projects. This point will be discussed in more detail in a later section. RATIONALE FOR THE IRR METHOD Why is the particular discount rate that equates a project’s cost with the present value of its receipts (the IRR) so special? The reason is based on this logic: (1) The IRR on 2 project is its expected rate of return. (2) If the internal rate of return exceeds the cost of the funds used to finance the project, a surplus remains after paying for the capital, and this surplus accrues to the firm’s stockholders. (3) Therefore, taking on a project whose IRR exceeds its cost of capital increases shareholders’ wealth. On the other hand, if the internal rate of return is less than the cost of capital, then taking on the project imposes a cost on current stockholders. It is this “breakeven” charac teristic that makes the IRR useful in evaluating capital projects. with an HP-10BIL or HP-17B, repeat the steps given in Footnote 3. Then, with an HP- and, after a pause, 1449, Project S¥ IRR, will appear. With the HP-17B, sim= to get the IRR. With both calculators, you would generally want to get both the NPV and the IRR after entering the input data, before clearing the cash flow register. The Technology Supplement explains how to find IRR sith several other calculators ply pressNet Present Value Profile A graph showing the relationship between a projects NPV and the firm's cost of capital. SELF-TEST QUESTIONS it ing ranking methods were discussed in this seq: en aenatod, and ve the rationale fore we, his sect What two methods always lead to the same accept/reject decision for indepen dent projects? What two piece of information does the payback period convey that are not con, veyed by the other methods? COMPARISON OF THE NPV AND IRR METHODS i In many respects the NPV method is better than IRR, soit is tempting to exp NPV only, to state that it should be used to select projects, and to g0 on tothe nat | topic. However, the IRR method is familiar to many corporate executives, i is wide) entrenched in industry, and it does have some virtues. Therefore, itis imporane you to understand the IRR method but also to be able to explain why, a times project with a lower IRR may be preferable to a mutually exclusive alternative with, higher IRR. NPV PRorFiLes A graph that plots a project’ NPV against cost of capital rates is defined asthe proj. ect’s net present value profile; profiles for Projects Land § are shown in Figure 10-4. To construct NPV profiles, first note that at a zero cost of capital, the NPVs simply the total of the project's undiscounted cash flows. Thus, at a zero cost of cap ital NPV. = $300, and NPV; = $400. These values are plotted as the vertical ais intercepts in Figure 10-4. Next, we calculate the projects’ NPVs at three costs ofcap- ital, 5, 10, and 15 percent, and plot these values. ‘The four points plotted on out graph for each project are shown at the bottom of the figure.® Recall that the IRR is defined as the discount rate at which a project's NPV equals zero. Therefore, the point where its net present value profile croses the Borizontal axsin- dicates a projects internal rate of return. Since we calculated IRRg and IRR, in an eat- lier section, we can confirm the validity of the graph, ; When we connect the data points, we have the net present value profile” NPV Profiles can be very useful in project analysis, and we will use them often in the re- ‘mainder of the chapter. : o tages he pins wth a nancial eaelatoy, enter the cash Rows in dhe cash flow rege emt = O, and press the NPV button to find the NPV sts sone coe ‘of capital. Then enter I Fo ore ana Weald thee FA uons and made the graph with our Excel model, See IOMODELeals: noe ta, at Hs NPV profes are ursed—they are not straight lines. NV appeoaches the ¢ = Oe nitely high cose of reise the cost of eapital increases without limit. The reason is that 2¢ ai! in our eumple a gpa the PV of the inflows would be zero, so NPV at (k = @) is simply CF with the horizontl ads ox 200- We should also note that under certain conditions the NPV’ profiles 8 ANS several times, or never cross it ‘This point i discussed latcr ithe chapet Hy te get the NPV at 5 percent. Repeat these steps for IO and 15 percent 402 | cuarren so «tHe sasics oF caPitat euacerineGrossover Rate ‘The cost of capital at which the NPV profiles of two Projects cross and, thus, at hich the projects’ NPVs are equal. — Oct = el Net Present Value Profiles: NPVs of Projects § and L at Different Costs of Capital : J Net Present Value ‘s) 400 300 <— Project L's Net Present Value Profile 200 Crossover Rate = 7.2% 100 Project S's Net Present Value Profile IRR, = 14.5% ' ° 5 72 10 i Cost of Capital (%) IRR, = 11.8% 100 COST OF CAPITAL NPVs NPV 0% $300.00 $400.00 5 180.42 206.50 10 78.82 49.18 15 (833) (80.14) NPV RANKINGS DEPEND ON THE Cost oF CAPITAL Figure 10-4 shows that the NPV profiles of both Project L and Project S decline as the cost of capital increases. But notice in the figure that Project L has the higher NPV ata low cost of capital, while Project $ has the higher NPV if the cost of cap- is greater than the 7.2 percent crossover rate. Notice also that Project L's NPV is “more sensitive” to changes in the cost of capital than is NPVs; that is, Project L’ net present value profile has the steeper slope, indicating that a given change in k has a larger effect on NPV, than on NPVg To see why L has the greater sensitivity, recall first that the cash flows from $ are received faster than those from L. In a payback sense, § is a short-term project, while Lis a long-term project. Nest, recall the equation for the NPV: Bch «ache 5 2 = 2 Ch NPV Ty Ge TEBE COMPARISON OF THE NPV AND IRR METHODS | 403‘The impact of an increase in the cost of capital is much greater on distane bn OS near-term cash flows. To illustrate, consider the following: oy ae PV of 100 due in I year @k = 5%: 7057 = $95.4, $100 of $100 due in I year @k = 10%: ——— = $99.9), Ey (1.10)! . 895.24 — $90, Percentage decline due to higher k = —"==7— = 4.50, < $100 . PV of $100 due in 20 years Ok = 5%: 7s = $37.00, $100 PV of $100 due in 20 years@k = 10%: 75 = SIH, $37.69 — $14.86 Percentage decline due to higher k = “=== = 60.6% “Thus, a doubling of the ciscount rate causes only a 4.5 percent decline in the py ofa Year I cash flow, but the same coubling of the discount rate causes the PY gf, Year 20 cash flow to fall by more than 60 percent. Therefore, ifa project has mos of its cash flows coming in the early years, its NPV will not decline very much if the cost ofeapital increases, but a project whose cash flows come later willbe severely penalized by high capital costs. Accordingly, Project L, which has its largest eal flows in the later years, is hurt badly if the cost of capital is high, while Projet which has relatively rapid cash lows, is affected less by high capital costs, Therefore, Project L’ NPV profile has the steeper slope. INDEPENDENT PROJECTS If an independent project is being evaluated, then the NPV and IRR criteria aluays lead to the same accept/reject decision: if NPV says accept, IRR also says accept. Tb see why this is so, assume that Projects L and S are independent, and then look back at Figure 10-4 and notice (1) that the IRR criterion for acceptance for either projet is thatthe projects cost of capital is less than (or to the left of) the IRR and (2) that whenever a project’ cost of capital is less than its IRR, its NPV is positive. Thus, a any cost of capital less than 11.8 percent, Project L will be acceptable by both the NPV and the IRR criteria, while both methods reject the project if the cost of eap- tals greater than 11.8 percent, Project S—and all other independent projects under consideration—could be analyzed similarly, and it will always turn out that ifthe IRR method says accept, then so will the NPV method. Mutuatty Exctustve Progects® Now assume that Projects § and L Thatis, we can choose either Project. not accept both projects. Notice in are mutually exclusive rather than independent. S or Project L, ot we can reject both, but we can Figure 10-4 that as long as the cost of capital is "This secon i relatively techicl, butt can be omited without os of continuity. 404 | carter 10» THE Basics oF caPrTAL BUDGETINGa a ‘ Ree ae percent, then (1) NPVs is larger than NPV, and Ta kere IRR Therefore if is greater than the crossover rate of 7.2 percent, - two methods both lead to the selection of Project S. However, if the cost of capi- tal is fess than the crossover rate, the NPV method ranks Project L higher, but the IRR method indicates that Project S is heter. Thus, a conflict exists if the cost of capital isles than the crosover rare, NPV says choose mutually exclusive L, while IRR says take S. Which answer is correct? Logic suggests that the NPV method is better, because it se- lects the project that adds the most to shareholder wealth.” | There are two basic conditions that can cause NPV profiles to cross, and thus conflicts to arise between NPV and IRR: (1) when project size (or scale) differences exist, meaning that the cost of one project is larger than that of the other, or (2) when tim- ing differences exist, meaning that the timing of cash flows from the two projects dif fers such that most of the cash flows from one project come in the early years while most of the cash flows from the other project come in the later years, as occurred with our Projects L and $.!° When either size or timing differences occur, the firm will have different amounts of funds to invest in the various years, depending on which of the two mutually ex- clusive projects it chooses. For example, if one project costs more than the other, then the firm will have more money at t = 0 to invest elsewhere if it selects the smaller project. Similarly, for projects of equal size, the one with the larger early cash inflows—in our example, Project $S—provides more funds for reinvestment in the carly years. Given this situation, the rate of return at which differential cash flows can be invested is a critical issue ‘The key to resolving conflicts between mutually exclusive projects is this: How useful is it to generate cash flows sooner rather than later? The value of early cash flows depends on the return we ean earn on those cash flows, that is, the rate at which we can reinvest them, The NPV method implicitly assumes that the rate at which cash floes can be reinvested is the cost of capital, whereas the IRR method assumes that the firm can reinvest at the IRR. These assumptions are inherent in the mathematics of the discounting process. The cash lows may actually be withdrawn as dividends by the Reinvestment Rate stockholders and spent on beer and pizza, but the NPV method still assumes that Assumption cash flows can be reinvested at the cost of capital, while the IRR method assumes “The assumption that cash Fearne rmerrean be Feiavestment at the projects IRR. escnnt the eos of wil ‘ean be" Which isthe better assumption—that cash flows ean be reinvested at the cost of Serre eae) capital, or that they ean be reinvested atthe projeetS IRR? Ie ean be demonstrated tnethod, or 2) atthe that the best assumption is that projects’ cash flows are reinvested at the cost of cap 1.!! ‘Therefore, we conclude that the best reinvestment rate assumption is the cost internal rate of return, if " aoe using the IRR method. of capital, which is consistent with the NPV method. ‘This, in tur, leads us to prefer the he crossover rae is easy to calculate, Simply go back to Figure 10-1, where we se forth the two proj ects! cath flows, and calculate the difference in those flows in each year. The differences are CFs ~ SN$0, +5400, +5100, ~$100, and ~$500, respectively. Enter these values in the eash flow register Jal ealculator, press the IRR button, and the erossover rate, 7.17% ~ 7.2%, appears. Be sure to = 0 oF else you will not get the correct answer. - 10 Ofcourse itis posible for mutually exclosve project to differ with respec to both sale an siming. Also, projets have different ives (5 opposed to diferent cashflow pattems over common nd for meaningful comparisons, some mucvally exclusive proj- Fora discussion of comparing projects with unequal lives refer Fundamentals of Financial Management, Oth ed. (Cincinnati, OH: 2 oF Web Appendix LID on the Conc web site, Tth ed Chapter 11 for a discussion enter CI if rotally excl life), this introduces further complications, ‘ects must be evaluated over a commie li Brigham and Joel F. Houston, College Publishing, 2003), Chapter Brigham and Daves, Inermediate Financial Management to Fugen South-Weste "Again, is point. ofMultiple IRRs ‘The situation where a project has two or more IRRs. NPV method, at least for a firm willing and able to obtain capital ata cost ray ably close to its current cost of capital. ; on. ‘Weshould reiterate that, when projects are independent, the NPV and IRR de kegt Tead to exatly the same accept/reject decision. Howeves, wen eagas ‘mutually exclusive projects, especially those that differ in scale and/or timing, the wet method should be used. 2 Muutiece IRRS* “There is one other situation in which the IRR approach may not be wable— ts when projects with nonnormal cash flows are involved. A project has normal ext Maen ree one of more cish outflows (costs) followed by a series of cis inom, Te however, a project calls fora large cash outflow sometime during ora the end Tlf then the projet as nonnorma cash flows. Projets with nonnormal sh fy, can present unique difficulties when they are evaluated by the IRR method, with can Dommon problem being the existence of multiple RRs, ‘When one solves Equation 10-2 to find the IRR for a project with nonnormal exh flows, (10-2) itis possible to obtain more than one solution value for IRR, which means that mal tiple IRRs occur. Notice that Equation 10-2 is a polynomial of degree n, soit hasn different roots, or solutions. All except one of the roots are imaginary numbers when investments have normal cash flows (one or more cash outflows followed by cash in flows), so in the normal case, only one value of IRR appears. However, the possibly of multiple real roots, hence multiple IRRs, arises when the project has nonnomal cash flows (negative net cash flows occur during some year after the project has been placed in operation). “Tp illustrate this problem, suppose a firm is considering the expenditure of $14 rnillion to develop a strip mine (Project M). The mine will produce a cash flow f $10 million at the end of Year 1. Then, at the end of Year 2, $10 million must beer pended to restore the land to its original condition. Therefore, the project’ expected net cash flows are as follows (in millions of dollars): EXPECTED NET CASH FLOWS YEAR O END OF YEAR 1 END OF YEAR 2 $1.6 +10 $10 “These values can be substituted into Equation 10-2 to derive the IRR forthe v= ment: _ =$1.6 million | $10 million | ~$10 million _ Vv = em ee (1+IRRY ~ (1+ IRR)! (1 + IRRY "2 This section is relatively technical, bue ie can be omitted without loss of continuity:RE — When solved, we fin , Yo0%. Therefore, Rar ae 0 when IRR = 25% and also when IRR = Ineionship is depicted graphically in Fines le is hoth 25 and 400 percent. This re- ifthe NPV method were used; we weal 10-5." Note that no dilemma would arise way use| histo evaluate the: projece IF Bio} ply use Equation 10-1, find the NPV, are ts NPV would be S07 raion oar Ms cost of capital were 10 percent, thet gon 25 and 400 percent, the NPV the project should be rejected. If k were would be positive, One of the authors encountered another example of multiple internal rates of return when a major California bank borrowed funds from an insurance company and then used these funds (plus an initial investment of its own) to buy a number of jet engines, which it then leased to a major airline. The bank expected to receive positive net cash flows (ease payments plus tax savings minus interest on the insurance company loan) for @ —— 1 Tf you attempted to find the IRR of Project M with many financial calculators, you would get am errop message. This same message would be given forall projets with mutiple IRRs. He find Projget MIS IRRs by frst calculating NPVs using several diferent values for kane NDV profile. The intersections with the X-axis give a rough idea of the IRR values. Finally, you ean wwe iriakand-crror to find the exact values of k that force NPV = 0. ‘Note, too, that some calculators, including the HP-1OBII and 17B, can find the IRR. rues, store ie, and repress the IRR key. With the HP-10BIL, type 10 M1 STO BIRR, and sae en 25.00, appears Ifyou enter 33 your guess a cos of capita les than the one 2 which NPY Keue 10-3 is mavimized (about 100%), the lower IRR, 25%, is displayed Ifyou gues high rte, 150, the higher IRR is shown. 1 oes Figure 10-5 suggest that the firm should try to ras its cose of ex Nimize the NPV of the project? Certainly not. The firm should seek to minimize se ie stock price to be maximized, Actions taken tors the cost of capital look good, but those etions would be terribly harmful to the frm more namsvoes Toate Only if the frm’ cost of eaptal is igh in spite of effort Keep ie down the error mes- sage, pital to about 100 percent in cost of order tom capital; this will eau: fight make this particular projes ojects with normal will the illustrative project have a positive NPV. E NPV Profile for Project M NPV {ilions of Dollars) 15 _-st6 + S10_-S10 NPV= St BST (1+ KF IRR, = 400% GOO Cost of Capital (%) —_——— ee IRR METHODS 407 compantson oF THE NEV ANDModified IRR (MIRR) ‘The discount rate at which the present value ofa project’ costis equal to the present value ofits terminal value, where the terminal value is found as the sum of the future values of the cash inflows, compounded at the firm's cost of capital. gative cash flows as it repaid the insuraney anand finally, a large intlow fm the aeafthe en net lease exp “The bank discovered wo IRRS al wondered whieh way correct, Te cul ny pore the IRR anal use the NPV ath see the Fane was already on the book the bank’ senor loan committee 2 wells Eola ean exatiner,y to know the return on the lease. The bank solution eae! for eal rr hernal race of reeurn’” as discussed in the next sectig presented illustrate one problem, multipfe IRR Fe ased with 2 project that has nonnormal cash flo having nonnormal cash flows could produce othe h Is to an incorrect accept/reject de ily applied, and this method le number of years, then several large ne ig using the “modi The exampl when the IRR ¢ IRR method on projects Hs Teh ag no IRR of an IRR that Tea NPV criterion could be & capital budgeting decision On. Ty ads ¢ ems all such cases, the conceptually correct —— eo SELF-TEST QUESTIONS Describe how NPV profiles are constructed. What is the crossover rate, and how does it affect the choice between mutually ex clusive projects? What two basic conditions can lead to conflicts between the NPV and IRR methods? Why is the “reinvestment rate” considered to be the underlying cause of conflicts between the NPV and IRR methods? Ifa conflict exists, should the capital budgeting decision be made on the basis of the NPV or the IRR ranking? Why? Explain the difference between, normal and nonnormal cash flows. What is the “multiple IRR problem,” and what condition is necessary for it to occur? MODIFIED INTERNAL RATE OF RETURN (MIRR)*5 In spite of a strong academic preference for NPV, surveys indicate that executives prefer IRR over NPV. Apparently, managers find it intuitively more appealing to evaluate investments in terms of percentage rates of return than dollars of NPV. Given this fact, can we devise a percentage evaluator that is better than the regular IRR? The answer is yes—we can modify the IRR and make it a better indicator of relative profitability, hence better for use in capital budgeting. The new measure is called the modified IRR, or MIRR, and it is defined as follows: V costs (10-28) "" Again, this section is relatively technical, but it can be omitted without loss of continuity 408 | CHAPTER 10 THE BASICS OF CAPITAL BUDGETINGtren rer ror etn ce TV. The di equal the PV of the costs define tothe MR ee HE PY Fe TV 8 If the investment costs are all incurred at to occurs at t = 1, as is true for the illatative P in Figure 10-1, then this equation may be 0, and if the first operating inflow re prolect Sand L that we first presented used: WV Sema +h" + MIRRY Cost = (10-2b) “(1+ MRR)” ‘We can illustrate the calculation with Project S: ° Cash Flows -1,000 PVofTV _1,000 MIRR = 12.1%. NPV 0 Using the cash flows as set out on the time line, first find the terminal value by com- pounding each cash inflow at the 10 percent cost of capital. Then enter N = PV = —1000, PMT = 0, FV = 1579.5, and then press the I button to find MIRRs = 12.1%. Similarly, we find MIRR, = 11.3%.!7 “The modified IRR has a significant advantage over the regular IRR. MIRR as- sumes that cash flows from all projects are reinvested at the cost of capital, while the regular IRR assumes that the cash flows from each project are reinvested at the proj- ect’s own IRR. Since reinvestment at the cost of capital is generally more correct, the modified IRR is a better indicator of a project's true profitability. The MIRR also Solves the multiple IRR problem. ‘To illustrate, with k = 10%, Project M (the strip thine project) has MIRR = 5.6% versus its 10 percent cost of capital, so it should be phere age several alternative definitions forthe MIRR. The differences primarily relate to whether neg- wha ck Hows thot ove after positive cash flows begin shouldbe compounded and weated as pare of te sae cad and treated asa cost. A related isue is whether neguve and positive flows in « gives ao eae be newed or erated separately. Fora complete dieuson see Willam R. McDaniel, Danie ¥en cary and Kenneth A. Jessel, “Discounted Cash Flow with Explicis Reinvestens Rates: Tutorial wad Extension,” The Financial Review, August 1988, 369-385, and David M. Shull, “Interpreting Rates of Fo es aed Rate of Return Approach” Financ Praie and Educa, Fal 199) 6-71. sfeluing the HP-17B, you cold ener he cash inflows in he exh Row epi (being sure to enter CF ~ 0) enter T= 10,and then prs. the NFV key to find TVs = 1579.50. The HP- ie nor have an NEV key, bat yo cn stil ws the cash Bow re Sd TV. Emer hee s flows in the cash low register (with CFo = 0) then enter 10, then press it Ey, ner ones whichis 1,078.82. Now; with the regular time vale keys, ent Ne sacl cael Mad press FV 0 find TV's = 157950. Siar procedures cn be used with other financial calculators. [ar] © With some calculators, opIFiED INTERNAL RATE OF RETURN (MI