In this episode, we delve into the critical criteria for evaluating and selecting investment projects, covering essential financial metrics and decision-making rules. We begin by exploring the structure of an investment project as a sequence of cash flows and the importance of the Net Present Value (NPV). This fundamental concept allows businesses to determine the profitability of a project by assessing whether the present value of cash inflows exceeds the outflows.

Listeners will also learn about the Internal Rate of Return (IRR)—the discount rate that sets NPV to zero—and the limitations of the IRR rule, particularly in cases of deferred payments, multiple IRRs, or mutually exclusive projects. Despite its insights into project profitability and sensitivity, the episode highlights why NPV is generally the preferred decision tool for its consistency.

We also introduce the Profitability Index (PI), valuable for project selection when resources are limited, and Economic Value Added (EVA), which measures the difference between a project’s revenue and resource costs. Each metric is discussed with practical considerations for real-world applications.

Tune in to this episode to understand the nuances of each metric and gain insights into making more informed, strategic investment decisions for your business.