Choose a convenient financial method for calculating economic effect: NPV (Net present value) – net present value (also called net present value), IRR (Internal rate of return – internal rate of return, Payback period – the payback period of the invested funds in the project.
The formula for calculating NPV is given below:NPV = NCF1/(1+Re)+...+NCFi/(1+Re)I where
NCF (or FCF – free cash flow – net cash flow at the i-interval scheduling;
Re – discount rate.
NPV means given income, i.e. income from the project is given at this point in time, not future. If NPV is greater than zero, then the funds will certainly appear in the result of the project. Thus, the NPV shows the feasibility of implementing the particular activity. If NPV is less than zero, forget about this project, the profits it will bring.
Internal rate (rate) of return (return on investment) (IRR) is an absolute value, in contrast to the NPV. The value of IRR is a measure of the discount rate at which NPV equals zero. Therefore, determine the internal rate of return at the rate of Bank interest, which the project does not get neither profit nor loss. For understanding of dependence of the NPV and IRR from the plot. In the figure, at low discount rate, the company gets profit, increasing the IRR, the profit of the company decreases.
Identify the payback period of invested money in the project (payback period). Analyze your project with an annual return of investment. The maximum payback period can be set by the enterprise, the main determine whether to return all the money spent on the project in time. Hoping one of these three indicators, you will not be able to fully determine the economic effect of the project, and only in the comparison of all indicators actually get the final conclusion on profit, profitability and the payback period of the project.