How to use this hub
Start with NPV as the primary decision metric, then use IRR and payback as supporting lenses. If you're comparing projects of different scale, use profitability index (PI) and consider capital constraints.
What each metric is good at
| Metric | Good for | Watch out for |
|---|---|---|
| NPV | Value created in dollars | Needs a sensible discount rate (MARR) |
| IRR | Return intuition | Can mislead with non-standard cash flows |
| Discounted payback | Liquidity / risk lens | Ignores cash flows after payback |
| PI | Ranking under capital constraints | Can favor small projects if used alone |
A decision workflow
- Pick a discount rate (MARR) consistent with risk and opportunity cost.
- Compute NPV and PI for the base case and a downside case (sensitivity).
- Check IRR only if it exists and the cash flows are standard (outflow then inflows).
- Use discounted payback to understand liquidity and risk exposure.
- If financing is involved, sanity-check payments and real return (inflation).
Common mistakes
- Using IRR alone (a high IRR on a tiny project can be less valuable than a lower IRR on a large one).
- Using simple payback without discounting (time value matters).
- Using nominal returns without considering inflation (use real return when needed).