Finance (Decision Criteria)

Payback

In this method you only see which option return first you investment

• It is the rate of return you earn per year over X years, which makes the NPV zero
• It is not recommended to use this method, because you do not see in the long term.
• Ex. If we evaluate, R&I will never be an option using Payment as method for decision because R&I pay in the long term
• It is very common by been easy to calculate

IRR

• The problem with this method is that only use two variables without considering the Interest Rate.
• It is possible that you don't get any extra money because even you see a positive number in the IRR, you are not considering the value of the money over the time
• When IRR is used it need to be compared against the NPV, when NPV is zero
• If the IRR is bigger than "r" is a good project. "r" is the rate result of the bench marking
• You can have multiples IRR, and in this case need to calculate where is the positive are

Formula

Excel

• IRR(values, [guess])
• values are all the periods. Ex. A1:A8