Corporate Finance & Investment Banking

Net Present Value (NPV)

NPV = Σ CFₜ / (1 + r)ᵗ − Initial Investment. Accept the project if NPV > 0; the discount rate r is the opportunity cost

Internal Rate of Return (IRR)

IRR is the discount rate that makes NPV = 0: Σ CFₜ / (1 + IRR)ᵗ = Initial Investment. Accept if IRR > cost of capital (h

Payback period

Number of years required for cumulative cash inflows to recover the initial outlay. Ignores time value of money and cash

IRR pitfalls — multiple and no IRR

Non-conventional cash flows (sign changes more than once) can yield multiple IRRs by Descartes' rule, or no real IRR at

Crossover rate (NPV profile intersection)

The discount rate at which two projects' NPVs are equal; computed as the IRR of the incremental cash flows (Project A −