is driven by quantitative inputs and does not consider nonfinancial metrics
npv vs payback periodeasy call right how about if option a requires an initial investment of 1 million while option b will only cost 10 the extreme numbers in the example make a point the npv formula doesn t evaluate a project s return on investment roi a key consideration for anyone with finite capital though the npv formula estimates how much value a project will produce it doesn t show if it s an efficient use of your investment dollars the payback period or payback method is a simpler alternative to npv the payback method calculates how long it will take to recoup an investment one drawback of this method is that it fails to account for the time value of money for this reason payback periods calculated for longer term investments have a greater potential for inaccuracy moreover the payback period calculation does not concern itself with what happens once the investment costs are nominally recouped an investment s rate of return can change significantly over time comparisons using payback periods assume otherwise 3npv vs internal rate of return irr the internal rate of return irr is calculated by solving the npv formula for the discount rate required to make npv equal zero this method can be used to compare projects of different time spans on the basis of their projected return rates 3for example irr could be used to compare the anticipated profitability of a three year project with that of a 10 year project although the irr is useful for comparing rates of return it may obscure the fact that the rate of return on the three year project is only available for three years and may not be matched once capital is reinvested 