Quick NPV, IRR, Payback Period Valuation Investment / Project Feasibility - Appraisal Model
Originally published: 11/02/2020 13:39
Publication number: ELQ-20589-1
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Quick NPV, IRR, Payback Period Valuation Investment / Project Feasibility - Appraisal Model

A Spreadsheet for a quick Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PPP) calculation.

This Excel model can be used to calculate the Net Present Value, Internal Rate of Return and Payback Period from a simple cash flow stream and see the valuation metrics in dynamic graphs.

One of the fundamental concepts in project and investment appraisal every corporate and business analyst must know is how to value different investments or operational projects.

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. This relies on calculated the sum of the discounted cash flows produced by a business or project in order to determine the business or projects value today. 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 IRR can also be compared to the cost of capital to check if the management should go ahead and make the investment or not.

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. However we incorporate the Payback Period using Discounted Cash flows to account for this.

To use the tool, simply enter your assumptions regarding the components of the First Year in the Model, discount rate, Investment today and future free cash flows.The tool is laid out as a one page document for ease of use so that the user can assess the impact of assumptions on the valuation .

This Best Practice includes
1 Excel Model

Nikolaos Giannoulis, CFA, AFM, CFM, MSc offers you this Best Practice for free!

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Further information

To quickly calculate NPV, IRR and Payback period for an investment.

Easy to use and quick valuation and project appraisal.

To make decisions on where to invest. A more complex model would need to be used.

4.8 / 5 (31 votes)

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