Calculating Return on Investment

Payback Period – The – Sometime in year 4 (cash flow switches from negative to positive) – Doesn’t take into account the of money

Time Value of Money – The assumption that – If you have a series of cash flows, then this would be calculated using a series of calculations A better way would be to use the

Using the NPV function =NPV(rate, value1 [value2, value3,...]) – =NPV (5%, 100, 100, 100, 100, 100) = $ If someone offers you the above cash flows for $400, would it be a good exchange? – (NPV 5%, 100, 100, 100, 100, 100 ) – 400 = $32.95 (the up-front payment that you make is not discounted)

Internal Rate of Return (IRR) Quite often, the rate that you supply in a function could be a “guestimate.” What happens if your rate guess is wrong? Internal Rate of Return – The point at which the net present value of an investment – If I require a return that is at least 9%, then this is not a good deal.

Both IRR and NPV provide a measure of the return by an investment. They can also be used in decision making when trying to determine which investment opportunity should be accepted.