Cash payback period

The cash payback period is the time period it takes to recover the cost of the capital investment from the cash flow generated by the investment. The cash payback is the cost of the investment divided by the net annual cash flow.

Net present value

The net present value discounts net cash flow to its present value. This method compares the present value of the cash inflow to the required investment. The net present value is the difference between the capital requirement and present value of cash flows.

Internal rate of return

Unlike the net present value, the internal rate of return finds the interest yield. The internal rate of return is the amount where NPV equals zero. Excel offers a great tool to help compute this number.

Annual rate of return

The annual rate of return is the expected annual cash flow divided by the average investment. The annual rate of return is compared with the required rate of return to see if the investment is acceptable. The required rate of return is based on the businesses cost of capital. The cost of capital is based on the weighted average of borrowed money and capital investments provided by equity owners.

These are just a few metrics with which a business owner can use to measure potential investments. Investing in new project could be quite risky but with taking the time out to analyze the investment, the chances of making bad investments are reduced.