NPV – Net Present Value
This is the sum of discounted net receipts of the investment by financial flow, reduced by the value of the investment. The project is acceptable if the NPV is> 0, and of course it is desirable that the figure is as high as possible.
For example, if you want to “interest” your funds with 20%, the calculation should be done with a discount rate 20%, and the desired interest will be achieved if the NPV is> 0
D – Discount rate
By discounting the financial flows of the investment, the time dimension of money is taken into account (Dinar is worth more today than tomorrow), D is the weighted average interest rate on sources of financing
It is calculated according to the formula:
D = Own funds x interest (%) + credit x interest (%) / Investment total
where interest on own funds is usually interest that can be earned by depositing own funds in a bank or placing them on the capital market.
IRR – Internal Rate of Return
IRR is the discount rate at which NPV = 0
In Excel it is calculated as NPV, but for D (discount rate) it is set to 0.
The disadvantage of this indicator is that it can favor projects that require less investment and result in lower returns in absolute terms.
To make the project acceptable: NPV> 0, IRR 2 x> D.