In a previous post, I covered an internal rate of return sample exam question, and I covered the keystrokes used on one of the calculators that may be used on the CIPM exam, the Texas Instruments Business Analyst II Plus (TI-BA II Plus).

There is, of course, another financial calculator that CIPM candidates may use on the exams, and that is the Hewlett Packard 12C. In this post, I will cover the keystrokes to do the exercise on the HP 12C.

Recall the particulars of the exercise:

What is the annual internal rate of return?

I also remind candidates that I covered the steps to calculating internal rate of return in this previous blog post.

Next, we should identify the important information in this problem; i.e., the cash flows that must be entered into the calculator – and those that should be ignored. The important cash flows are:

- the initial market value of $2,225,000 on 1/1/2005
- the contribution of $50,000 on 5/1/2005
- the contribution of $40,000 on 7/1/2005
- the ending market value of $2,445,000 on 12/31/2005

You can ignore the dividends that are described because they are “reinvested” – this means they remain in the portfolio and are not an external cash flow. If they were “not reinvested,” that would mean that they should be treated as withdrawals at the time of payment… but that is not the case here.

You can also ignore the other valuations that are given. With internal rate of return calculations, only the initial value and the ending value are needed.

In order to enter this into your financial calculator, you will need to evenly space the cash flows (in time) and “zero fill” the empty periods. In this problem, you can assume monthly occurring cash flows if you treat the initial market value as being for 12/31/2004, and the contributions as occurring on 4/30/2005 and 6/30/2005 (rather than 5/1/2005 and 7/1/2005).

The “zero filled” cash flows will be on the following dates: 1/31, 2/28, 3/31, 7/31, 8/31, 9/30, 10/31 and 11/30.

Thus, the following keystrokes may be used on the HP 12C calculator:

At this point, the calculator should tell you the solution is 0.4636%. But, this is a monthly return, because the spacing of our cash flows was monthly. We now need to convert this to an annual return. To do this, do the following steps:

- divide by 100 (converting the percentage to a decimal)
- add 1 (creating a wealth relative)
- raise the result of the last step to the 12th power
- subtract 1
- multiply by 100

This should give you an annual return of 5.70%

Happy studying!

Have a example that I am frustrated with. It is as follows:

Meg and John bought an older home (40000.00) that was in need of repairs. Immediately they spent 5000.00 in repairs. End of year one they spent 1000.00 on lawns, 3000.00 on gutters at end of 3rd year, and 1500.00 on windows at the end of year 5 .

If they sold it at the end of year 5 for 100000.00 what is the IRR?

when I calculate I must be missing a process. I entered this as :

0 PMT

40000.00 CHS PV

100000.00 FV

5 N

I is coming up as 20.11 and that isnt one of my choices.

Can you tell me what I am doing wrong in the entering process.

Thanks

Kathy

Kathy, I plugged your values into a spreadsheet and used XIRR:

1/1/2014 (40,000.00)

1/1/2014 (5,000.00)

12/31/2014 (1,000.00)

12/31/2016 (3,000.00)

12/31/2017 (1,500.00)

12/31/2017 100,000.00

19.96%

Kathryn,

You’ll need to space out the values in the 12c.

My calculations are as follows:

Initial outlay is (40000) + (5000) = (45000)

First year = (1000)

Second year = 0

Third year = (3000)

Fourth year = 0

Fifth year = 100000 + (1500) = 98500

So, on the 12c:

45000 CHS CF0

1000 CHS CFj

0 CFj

3000 CHS CFj

0 CFj

98500 CFj

f IRR -> 15.55%

Joshua, sorry for not responding sooner. Our blog software is supposed to alert me whenever a comment is made; but, it is failing us: something to work on, I guess.