Case type 14
Investment and capital project decisions
Is this project worth it: payback, net present value (NPV), and internal rate of return (IRR), compared with the cost of capital and the alternatives.
19 min1 lesson Last reviewed
Start the lesson Investment and capital project decisions
How do you approach an investment decision case?
- Estimate the cash flows, then judge the project on payback, net present value and internal rate of return against the cost of capital.
- Weigh the risks and the option of doing nothing.
- The most common mistake: relying only on payback, which ignores the time value of money and any cash after the payback date.
- Compute payback, then NPV at the cost of capital, then compare the return with the alternatives and the risk, rather than approving any project that makes money on paper.
By the end you will be able to
- Calculate payback, NPV, and an approximate IRR
- Compare a project with the cost of capital and with other uses of the money
- Avoid adding up future cash without discounting it
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Common questions: Investment and capital project decisions
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