Your article was brief but valid and applicable. I especially appreciate the points you made about why not to use Payback Period (commonly called "ROI").
Personally, I calculate the NPV and IRR on all projects. These two metrics always come to the same conclusion (in fact, they're related), but show different aspects of the investment.
For those who want a better understanding, I recommend "Essentials of Corporate Finance", ISBN 0-07-234052-5. It shows how to use spreadsheets to do the heavy lifting. It also contrasts the different budgeting techniques (as you touched on in your article), and how their popularity has changed over time.
Thanks for a great article.
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Can someone clarify which section refers to which re NPV/IRR. Payback is at least headed.
As for the sentence "Now let?s finally look at the first and the most popular method" ... oh dear.
As for the sentence "Now let?s finally look at the first and the most popular method" ... oh dear.
It looks like they will be covered in his next articles. See the last line of his article.
"Next time, we?ll look into the other two more methods. I promise, it does get better, albeit not necessarily more fascinating."
"Next time, we?ll look into the other two more methods. I promise, it does get better, albeit not necessarily more fascinating."
A main reason ROI determinations are often less persuasive and less reliable than expected is that the emphasis is only on the arithmetic (i.e., "number crunching") and fails to get the right numbers about the right things. Failing to quantify intangibles leaves a giant loophole which essentially nullifies any potential value of disciplined ROI calculations involving only tangibles. Our REAL ROI? methodology overcomes these and eight other common but seldom-recognized pitfalls in traditional uses of ROI. See www.ProveIT.net for whitepaper.
I am not sure why you felt constrained to do this.
I thinkI was clear that non-economic costs and benefits will be discussed in a future article.
I thinkI was clear that non-economic costs and benefits will be discussed in a future article.
Good introduction to the concepts! However, I believe the representation of NPV was a little off. While it is definitely better to have cash flows sooner rather than later, it is not directly related to investment alternatives. More to the point, earlier cash flows are preferred due to the effect of inflation. $100 today purchases more than $100 a year from now (see inflation in fuel prices over past year). And, of course, when you receive those earlier inflows, you can invest them to offset any decreases in purchasing power caused by inflation 
Also, when taken together with the payback method, one can assess the net value of the project over a period of time including the effects of inflation.
Also, when taken together with the payback method, one can assess the net value of the project over a period of time including the effects of inflation.
I have not really discussed the NPV yet (saved for the next installment). The explanation of the time value of money is a classic one and does not contradict what you are saying.
Yes, you can discount future cash flows for payback as well; this is included in the sequel to this article. Thanks!
Yes, you can discount future cash flows for payback as well; this is included in the sequel to this article. Thanks!
$1m. buys rather more property and stocks and shares today than a few months ago and may buy rather less than the same amount in another few months time. It's merely a tool to enable a like-for-like comparison with inherent dangers. For example, it is one of the lures behind short selling - works 95 times out of a 100; when it fails, ....
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