Pitfalls of Precise Projections

Creating financial projections is a critical discipline, particularly for growing companies seeking capital and needing to share revenue and expense forecasts with investors and creditors. However, this cannot be a “set-it-and-forget-it” exercise. Supplier disruption, competitive threats, and changing consumer behaviors…

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NPV and IRR: A Refresher Course

Admit it. In the face of more tactical accounting issues, you’ve found yourself out of practice with NPV (Net Present Value) and IRR (Internal Rate of Return) applications. To help jog your memory, we’re offering a quick refresher on the key differences between the methods – what you are measuring and why – as well as general scenarios in which one method is more advantageous than another.

Dusting Off Your Financial Toolkit

As a finance professional, you are engaged in – if not responsible for – capital budgeting for your firm. In order to compare and prioritize investments like equipment, technology, or even an acquisition, you likely use 1 of 3 financial formulas: payback method, NPR, and IRR. While the payback method is easy to calculate and understand – determining when you’ll make back the money invested – it doesn’t account for the future value of money.

NPV

NPV is a highly effective gauge for companies using “today’s dollars for future returns” and, thanks to Excel, it’s easy to calculate. [Harvard Business Review]

NPV= ∑ [Period Cash Flow / (1+R)^T] – Initial Investment

R is the discount rate and T is the number of time periods. [Investopedia]

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