A dynamic standard that reflects the profitability of an investment project during its construction and production service life.

The sum of the present values ​​of net cash flows in each year during the entire construction and production service life calculated at a certain discount rate

When NPV≥0, the project is feasible;

When NPV＜0, the project is not feasible

The greater the net present value, the greater the priority.

Net present value is additive

The net present value criterion assumes that a project will generate intermediate cash flows Amount that can be reinvested at a minimum acceptable rate of return

The NPV calculation takes into account changes in the expected term structure and interest rates

Current decision-making denies the flexibility of decision-making

Internal rate of return is different from cost of capital

IRR is calculated based on the cash flow of the project itself, reflecting the expected rate of return on project investment; capital cost is the minimum rate of return required by investors to invest in the project.

IRR≥project capital cost or minimum investment rate of return feasible

IRR＜Project capital cost or minimum investment rate of return Not feasible

Also known as the present value index, it refers to the ratio of the present value of future cash inflows to the present value of cash outflows of an investment project.

When PI≥1, the project is feasible

When PI＜1, the project is not feasible

Advantages: The profit index is expressed as a relative number and can be compared between independent schemes with different investment amounts.

Disadvantages: Ignores differences in the scale of mutually exclusive projects and may draw conclusions different from net present values, misleading decision-making.

PP <Baseline Payback Period Accept

PP > Baseline Payback Period Give Up

Advantages: simple method, intuitive reflection, wide application

shortcoming

Simple average calculation of the total net income in each year after the project is put into operation

Arithmetic mean of book value of fixed asset investments (Can also include working capital investment amount): This will be affected by the depreciation policy

If ARR > Baseline accounting rate of return, the plan should be accepted;

If ARR <base accounting rate of return, the plan should be abandoned.

Among the choices of multiple mutually exclusive plans, the project with the highest accounting rate of return should be selected.

Advantages: concise, easy to understand, easy to calculate

shortcoming

Measure the impact of changes in uncertainty factors on evaluation criteria

Find out which factor table the profitability of an investment opportunity is sensitive to

Provide decision-makers with important decision-making information

If a factor related to decision-making changes, how will the NPV and IRR of the original plan be affected.

Determine sensitivity analysis objects

Choose uncertainty factors

Adjust cash flow

Be able to consider the risks that changes in different factors bring to investment projects

It is easy to find the factors that have a greater impact on investment projects and conduct detailed investigation and control.

Only changes in each factor are considered, and the interaction between factors is not considered.

May subjectively overestimate or underestimate changes in factors

Accounting break-even analysis determines the sales volume of a product or company at which revenue just covers costs, and the net income of the product or company is zero.

Net present value break-even analysis requires finding the sales volume when the future cash inflow of the investment exactly makes up for the cash outflow, that is, seeking the sales volume necessary when the net present value of the project is zero.

Net cash flow = cash inflow – cash outflow

Net cash flow (NCF) - the difference between cash inflows and cash outflows within a certain period of time

Cash outflow – additional cash outlays resulting from the investment

Cash inflow - the amount of cash income increased or cash expenditure saved due to the investment

When measuring the income and costs of investment projects, cash flow is used instead of accounting income. The future cash flows of the project must be calculated using expected future prices or costs, not current prices or costs.

In capital budgeting analysis, only those projects that would have Cash flows that occur (or do not occur) are what should be included in the analysis

Definition: The investment or abandonment of this project is not affected by the investment decisions of other projects.

When evaluating independent projects, attention should be paid to whether it is financing or investment and whether the cash flow is unconventional.

Definition: Mutually exclusive items, that is, if item A is selected, item B cannot be selected again

Questions and options