Finance
Investment decisions
Which projects to fund, compared on NPV, IRR, MIRR, payback and profitability index.
Capital budgeting: compare projects on the measures a finance committee asks for, see where they disagree, and choose under a budget.
Compare projects
Enter up to three projects’ cash flows: the outlay today as a negative number, then what each year brings back. Every measure is worked out as you type.
- NPV is the measure to decide on: it is the value a project adds at your cost of capital. The others are summaries that can mislead when projects differ in size or timing.
- Payback ignores everything after the money comes back; discounted payback ignores less but still stops counting.
- When the cash-flow signs change more than once there can be several IRRs, or none. MIRR always gives one answer.
NPV profile
The same projects at every discount rate. Each line crosses zero at its IRR; where two lines cross, the projects are worth the same and the ranking flips.
Capital rationing
More good projects than money. Ranking by profitability index is the textbook shortcut; with whole projects it can miss the best combination, so this checks every combination too.
Dark bars are in the best set. The PI shortcut takes projects from the top down while they fit.
Sources
- Brealey, R. A., Myers, S. C. and Allen, F. Principles of Corporate Finance, chapters 5–6: NPV and its competitors, multiple IRRs, capital rationing.
- Lorie, J. H. and Savage, L. J. (1955). Three problems in rationing capital. The Journal of Business, 28(4), 229–239.
- MIRR as defined in Excel and numpy-financial: negative flows discounted at the finance rate, positive flows compounded at the reinvestment rate.