Compare a project's investment against its yearly benefits. Get NPV, ROI, payback period, benefit-cost ratio and IRR in one place.
| Measure | Formula | Select if |
|---|---|---|
| NPV | Σ CF÷(1+r)ᵗ − Investment | NPV > 0, higher is better |
| IRR | Rate where NPV = 0 | IRR > required rate |
| ROI | (Total benefit − Cost) ÷ Cost | Higher |
| Payback | Investment ÷ annual benefit | Shorter |
| BCR | PV of benefits ÷ Cost | > 1 |
Payback ignores the time value of money and benefits after payback. NPV is the most reliable measure because it discounts cash flows. Sunk costs are never considered in a go/no-go decision.
NPV is generally preferred because it gives the absolute value created. IRR is a percentage and can mislead when comparing projects of different sizes.
A BCR above 1.0 means benefits exceed costs. The higher the ratio, the better.
No. Simple payback period ignores discounting, which is its main weakness.