Investment Project Analysis Dashboard
Evaluate the economic feasibility of an investment project using capital budgeting models.
Project Information Input
Net Present Value (NPV)
$13,278
Accept Project
If NPV > 0, the project generates returns above the hurdle rate.
Internal Rate of Return (IRR)
21.65%
Accept Project
If IRR > Discount Rate, the project is feasible.
Payback Period
2.21 Years
Favorable for short-term liquidity.
Time required to recover the initial investment.
Discounted Payback Period
2.82 Years
Considers the time value of money.
Recoverable within the project life (3 Years).
Yearly Cash Flow Analysis
| Item | Year 0 | Year 1 | Year 2 | Year 3 |
|---|
Key Decision Models
Net Present Value (NPV)
Calculates the present value of all future after-tax cash flows from a project, minus the initial investment. It is considered the most rational investment decision method.
- Decision Rule: Accept the project if NPV > 0; reject if NPV < 0.
- Advantages: Considers the time value of money and shows the absolute value creation of the project.
- Disadvantages: Requires an accurate discount rate estimation and may not be intuitive for comparing projects of different sizes.
Internal Rate of Return (IRR)
The discount rate that makes the Net Present Value (NPV) of a project equal to zero. It represents the expected rate of return on the investment.
- Decision Rule: Accept the project if IRR > Hurdle Rate (cost of capital); reject if IRR < Hurdle Rate.
- Advantages: Easy to understand as it's expressed as a percentage return.
- Disadvantages: Can yield multiple results for non-conventional cash flows and assumes reinvestment at the IRR, which can be unrealistic.
Payback Period
Measures the time it takes to recover the initial investment. It focuses on the project's liquidity and risk.
- Decision Rule: Accept if the period is shorter than a target payback period.
- Advantages: Simple to calculate and understand; useful for assessing liquidity.
- Disadvantages: Ignores the time value of money and cash flows after the payback period, thus not reflecting overall profitability. (The 'Discounted Payback Period' is an improved version that addresses the time value of money.)
Capital Budgeting Cash Flows
In capital budgeting, the focus is on actual cash inflows and outflows, not accounting profit. Cash flows are typically categorized into three stages.
1. Initial Cash Flow (Year 0)
The cash outflow that occurs at the beginning of the project.
- Direct Effect: Asset acquisition cost (purchase price, shipping, installation, etc.).
- Indirect Effect: Increase in working capital, cash flow from disposal of an old asset (sale price ± tax effect on gain/loss).
2. Operating Cash Flow (During Project Life)
The after-tax cash flow generated during the project's operating period.
After-Tax Operating CF = (Pre-Tax Income - Depreciation) × (1 - Tax Rate) + Depreciation
or
After-Tax Operating CF = After-Tax Income + Depreciation × Tax Rate (Depreciation Tax Shield)
3. Terminal Cash Flow (At End of Project)
The cash flow that occurs at the end of the project.
- Direct Effect: Salvage value of the asset (sale price).
- Indirect Effect: Tax effect on the gain or loss from disposal, recovery of initial working capital.