Today we will look at various ways to internally appraise projects in a company. These frameworks are more appropriate for business administrators but they can be modified for use by some investors.
Let us begin with common metrics :
a) Net Present Value (NPV)
NPV = Cash Outflow - Present value of incoming cashflow
This is the most basic of all investment appraisal techniques. Where the NPV is a positive number ( such as +$10,000 ), the project is viable. Where it is negative, you are likely to be throwing good money after bad projects. This can be manipulated by projecting a different future incoming cashflow and lowering the discount rate in the calculations.
b) Internal Rate of Return (IRR)
This measure calculates the proper discount rate that would set the NPV measurement of zero. On a spreadsheet, the IRR() and XIRR() functions can perform this calculation separately. When you use IRR you no longer have...