This excel file will allow users to calculate the net present value, internal rate of return and payback period from a simple cash flow stream and see the results of the scenarios in dynamic graphs.
One of the most important concepts every corporate financial analyst must learn is how to value different investments or operational projects. The analyst must find a reliable way to determine the most profitable project or investment to undertake.
The net present value (NPV) is a valuation/feasibility metric calculated by subtracting the present values of cash outflows from the present values of cash inflows over a period of time. It is assumed that an investment with a positive NPV will be profitable, and an investment with a negative NPV will result in a net loss. Only investments with positive NPV values should be considered.
The internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and be undertaken first.
The payback period in capital budgeting refers to the period of time required to recoup the funds expended in an investment or to reach the break-even point. But there is one problem with the payback period. It ignores the time value of money, unlike net present value & internal rate of return.
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