Finance teams approve capital projects with a handful of measures, each answering a different question:
- Payback: how many years until the cash flows add back the outlay. Find the last year the running total is negative, then add the fraction of the next year needed: years so far + amount still owed / next year's cash flow.
- Discounted payback: the same on discounted cash flows. It can be "never".
- NPV and IRR: value added, and the rate the project earns. When the cash flows change sign more than once, such as a cleanup cost at the end, IRR can have more than one answer. MIRR fixes that by discounting the costs at the financing rate and growing the inflows at a reinvestment rate:
=MIRR(values, finance_rate, reinvest_rate).
When only one project can go ahead, rank by NPV: IRR favors small projects with high rates. And when lives differ, compare the cost per year, =PMT(rate, life, -PV of costs), not the totals.