NPV, IRR, MIRR, payback period are some of the tools that are available to an analyst to find an investor's ROI - return on investment. The IRR and MIRR are percentage interest rates, whereas the NPV is a money amount. In contrast payback period is the time required to recover the initial cost incurred in undertaking the project. Here me Abraham A. will present comparative analyis of all such methods to show pros and cons of each method.
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Finding net present value, internal rate of return, modified IRR, and payback period with paper and pencil is a time consuming task, we will save you the time and headache by offering you software tools such as Excel worksheet functions and Windows 7 & 8 calculators that will help find the NPV, IRR, MIRR and payback period with relative ease. Follow the links shown below for more information
A comparative analysis of dcf techniques including NPV, IRR, MIRR, benefit to costs ratio and payback period. Learn in detail how one or the other capital budgeting technique may be suitable in one instance yet another dcf technique is more appropriate in other circumstances.
The internal rate of return or IRR method in DCF analysis provides an investor with a required rate of return. This rate is used in conjunction with cost of capital otherwise called the discount rate to measure the suitability of the acceptance or rejection of the investment. An IRR that is higher than the WACC or cost of capital is usually regarded as the reason for acceptance yet when IRR falls below the WACC the project is not deemed worthy. This said, in many instances multiple IRR values may exists and one can't be sure which one of these multiple IRR is the true IRR. On the other end of this extreme, there are cases where there might not exist any IRR value thus leaving you with no yard stick to measure the investment strings. Due to these extreme cases investors can rely on an altered or modified version of the internal rate of return commonly knowns as MIRR (i.e. Modified Internal Rate of Return). There is a straight forward mathematical formula that calculates MIRR the only condition set forth to finding MIRR with the formula states that there be at least one negative and one positive cash flow amongst the stream of cash flows. MIRR is a geometric average of future values and present value of cash flows. In a nutshell both IRR and MIRR are percentage rates where as in some cases an investor would need more than just a rate by which to decide the viability of an investment proposals as we will shortly see.
In the previous paragraph I outlined the pros and cons of rates of returns such as IRR and MIRR, here I will discuss NPV in comparison with IRR. NPV which is an acronym for net present value is simply the difference of discounted benefits and discounted costs. Think of it this was without the discounting process NPV will be the gross profit as we call it, with NPV we use the discounting cash flow analysis to bring the future gains in terms of money if we had it today. An NPV can inform an investor about the amounts to be gained or lost from investing in a particular project. Since investment is all about money to begin with thus the NPV method seems like a logical choice for many managers and investors as compared to a percentage rate such as IRR. That said if mutually exclusice project vary in size and life span, using NPV in such cases may give us a distorted picture. However that said, we can resort to replacement chain analysis to find NPV for projects that are different in life span. In brief, NPV is measured in money amounts whereas IRR is a percentage rate. Usually managers may used both of these in conjunction whilst making an investment decision.
Whilst it may be useful to know the amount of money we hope to gain to expect to lose from an investment, yet an investor would probably want to know how fast they can recoup the initial costs associated with the investment project. Corporate managers usually set aside goals such as maximum time period within which they expect to break even. Since most of the projects may be medium term projects thus knowing when you will get back the initial costs can help decide whether it is worth it even though a project may make you money however it takes a long time for the bottom line to be in black. Here a point to note is about the time value of money when calculating payback time, there are two types of payback period one an undiscounted one and the second a discounted payback period. The advantage of using the discounted payback period is emphasized with the discounted cash flow analysis that takes into consideration the time value of money. So in summary whilst it may be important to know the money amounts to tbe gained or lost from investing certain managers would prefer to know the time period required to be in black
We have just discussed the importance for an investment manager to know the time required to recoup costs of a project however it may be important to an investor to know compartive benefits from projects. This can be measured with a ratio called profitability index or commonly called B/C ratio which stands for benefits costs ratio. This ratio is a comparative indicator of worthiness of one project as compared to the others. A project may have short payback time, yet it may not be as beneficial compared to a project that takes longer to be in black. The comparison in such as case is more appropriate with B/C analysis that can tell, for example, that Project X is twice more beneficial than Project Y. Even though Project X has longer payback time however since it provides twice as much as Project Y thus it may well be selected instead of a project with lesser payback time.
Finance tutorials on a variety of topics ranging from finding ROI using IRR, NPV, Payback period, etc. TVM calculations i.e. present value & future value of loans and bank deposits. Valuation & yield on stocks and bonds i.e. cost of equity, & debt. Rates of return on investments i.e. ARR, GRR, holding period return & yield.
Excel 4 finance to perform DCF analysis NPV, xNPV, IRR, xIRR, MIRR, xMIRR etc. Time value of money calculations i.e GRADIENT, INTEREST RATE, NPER, PMT, etc, yields and prices of bonds and stocks. Rates of return i.e. HPR, HPY, AHPR, and AHPY, etc.
TI BA II plus guide to analyze investments using capital budgeting methods i.e IRR, NPV, MIRR etc. TVM calculations i.e. RATE, NPER, PMT, PV, FV. Interest rate factors i.e. PVIFA, PVIF, FVIFA, FVIF, etc .
Finance tables to find interest factors for present value and future value of $1 and of annuities with start of period and end of period payments in amount of $1. Interest rates for growing and shrinking annuities are available as well.