Investment Appraisal: NPV, IRR, and Payback

What you will go through

1. 1
   1 Step 1 of 8 ·2 min Map the Investment’s Cash Flows Identify relevant initial and future cash flows, distinguish sunk costs, and place a simple project on a year-end timeline.
2. 2
   2 Step 2 of 8 ·3 min Bring Future Cash into Today’s Money Translate a single future cash flow into today’s money with a supplied annual discount rate.
3. 3
   3 Step 3 of 8 ·4 min Calculate and Interpret NPV Calculate net present value by combining discounted future inflows with the undiscounted initial outlay, then interpret the result using the required return.
4. 4
   4 Step 4 of 8 ·3 min Measure How Quickly Cash Is Recovered Calculate simple payback from cumulative undiscounted cash flows, estimate a fractional recovery period with an explicit timing assumption, and recognize key limitations.
5. 5
   5 Step 5 of 8 ·4 min Find the Return That Makes NPV Zero Bracket a conventional project’s internal rate of return with trial NPVs, then compare it with the required return.
6. 6
   6 Step 6 of 8 ·3 min Choose the Right Metric for the Decision Use NPV, IRR, and payback for their distinct decision roles, and resolve conflicting rankings between mutually exclusive alternatives.
7. 7
   7 Step 7 of 8 ·3 min Check How Much the Assumptions Matter Use a one-at-a-time sensitivity check to see whether an adverse assumption changes the NPV-based decision signal.
8. 8
   8 Step 8 of 8 ·4 min Complete an Investment Appraisal Apply NPV, IRR, payback, and a sensitivity check to reach a concise, conditional investment recommendation.