Project Valuation and Investment Decision Analysis
Measure the economic value of investment projects with NPV, IRR, MIRR, XIRR, the profitability index, payback and advanced risk analysis.
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Core principle: incremental cash flow: Include only the cash inflows and outflows that arise because the investment is accepted.
4 — Valuation results
Project valuation methods
Net present value — NPV
The monetary economic value created above the required return. For mutually exclusive projects, NPV is the primary value-creation metric when assumptions are consistent.
Internal rate of return — IRR
The discount rate that sets NPV to zero. Complementary to NPV; not a stand-alone decision rule when cash-flow signs change more than once.
Modified IRR — MIRR
Uses separate finance and reinvestment rates for negative and positive cash flows.
Profitability index — PI
Present value of inflows per unit of present value of outflows.
Payback period
Time until cumulative nominal cash flow turns non-negative. Ignores the time value of money and cash flows after payback.
Discounted payback
Payback applied to cash flows already discounted at the hurdle rate.
Equivalent annual annuity — EAA
Useful when comparing repeatable projects with different economic lives. Comparing total NPVs alone can mislead in that setting.
Sensitivity analysis
Shows how NPV moves when one or two assumptions change, other things equal.
Scenario analysis
Combines several assumption changes into base, upside and downside paths.
Monte Carlo analysis
Draws many combinations of uncertain inputs and reports a distribution of NPV and IRR.
This application is prepared for financial analysis and education. Results depend on the assumptions and cash-flow forecasts entered by the user. Project valuations can change materially with economic conditions, taxes, financing terms, project risk, FX, inflation, regulation and operating outcomes. Results are not, by themselves, investment, credit or financing advice.