2. Intro
• This method allows proceeding with a project
whether it is under budget or over.
• Following are the common methods for
comparing projects on the basis of their cash
flow forecasts.
• 1. Net profit
• 2.Payback period
• 3.Return on investment
• 4. Net Present value.
• 5.Internal rate of return.
3. Net profit
• The net profit of the project is the difference
between the total costs and the total income
over the life of the project.
4. Payback period
• The payback period is the time takes to break
even or pay back the initial investment.
• The project with the shortest payback period
will be chosen on the basis that an
organization will wish to minimize the time
that a project is ‘in debt’.
5. Return on investment
• ROI- also known as Accounting rate of return
ARR., provides a way of comparing the net
profitability to the investment required.
• ROI= average annual profit/total investment*100
• It provides a simple , easy to calculate measure of
return on capital and is quite popular.
6. Net Present value
• NPV- the calculation of net present value is a
project evaluation technique that takes into
account the profitability of a project and the
timing of the cash flows that are produced.
• It does so by discounting future cash flows by
the percentage known as the discount rate.
7. Internal rate of return.
• IRR- it provides the profitability measure as a
percentage return that is directly comparable
with interest rates.
• The IRR is calculated as that percentage discount
rate that would produce an NPV of zero.
• It is easy to calculated using a spreadsheet or
other computer program.
• IRR is a convenient and useful measure of the
value of a project in that it is a single % figure
that may be directly compared with rates of
return on other projects or interest rates quoted
