Head-to-Head
NPV measures total currency wealth created ($NPV = PV - I$), while Profitability Index (PI or Benefit-Cost Ratio) measures return efficiency per currency unit invested ($PI = PV / I$). When capital is constrained, PI is optimal for ranking.
Net Present Value (NPV)NPV = PV(Inflows) - Initial Investment
VS
Profitability Index (PI)PI = PV(Inflows) / Initial Investment
Key Verdict: Use NPV when investment capital is unlimited to maximize total shareholder wealth. Use Profitability Index (PI) when operating under a strict capital expenditure ceiling to assemble the highest-value project portfolio.
Head-to-Head
Discounted Cash Flow (DCF) is the overarching valuation framework that discounts future cash flows to present value. Net Present Value (NPV) is the net dollar surplus obtained by subtracting the upfront cost from the DCF.
Net Present Value (NPV)NPV = -Initial Outlay + Σ [CF_t / (1 + r)^t]
VS
Discounted Cash Flow (DCF)DCF (Enterprise Value) = Σ [FCF_t / (1 + WACC)^t] + [Terminal Value / (1 + WACC)^n]
Key Verdict: DCF is the valuation technique that determines the total present value of cash flows. NPV takes that DCF result and subtracts your acquisition cost or capital investment to determine if the deal creates net economic profit.
Head-to-Head
NPV measures the absolute dollar or rupee value added by an investment, while IRR measures the percentage rate of return. When ranking mutually exclusive projects, NPV is theoretically superior.
Net Present Value (NPV)NPV = -I_0 + Σ [CF_t / (1 + r)^t]
VS
Internal Rate of Return (IRR)0 = -I_0 + Σ [CF_t / (1 + IRR)^t]
Key Verdict: When projects are mutually exclusive or subject to capital constraints, always prioritize Net Present Value (NPV). Use IRR as a secondary sanity check to communicate rate-of-return to stakeholders.
Head-to-Head
Return on Investment (ROI) is a simple percentage gain metric, while NPV discounts multi-year cash flows to account for time value, inflation, and capital cost.
Net Present Value (NPV)NPV = -I_0 + Σ [CF_t / (1 + r)^t]
VS
Return on Investment (ROI)ROI = (Net Profit / Total Cost) * 100%
Key Verdict: For any capital expenditure spanning more than 12 months, NPV is non-negotiable. Simple ROI should only be used for short-term single-period marketing campaigns or quick screening.
Head-to-Head
Present Value (PV) is the current worth of future cash inflows without subtracting upfront investment ($PV = \sum CF_t / (1+r)^t$). Net Present Value (NPV) subtracts initial cost from PV ($NPV = PV - I_0$).
Net Present Value (NPV)NPV = -I_0 + Σ [CF_t / (1 + r)^t]
VS
Present Value (PV)PV = Σ [CF_t / (1 + r)^t]
Key Verdict: Present Value (PV) evaluates what future cash is worth today. Net Present Value (NPV) takes that PV and determines if it exceeds what you must pay to get it.
Head-to-Head
Present Cost (PC) discounts future operating and maintenance expenses back to today. Net Present Cost (NPC) combines initial capital expenditure with all discounted future operating costs minus discounted salvage revenues.
Net Present Cost (NPC)NPC = Initial Outlay + Σ [Operating Cost_t / (1 + r)^t] - [Salvage Value / (1 + r)^n]
VS
Present Cost (PC)PC = Σ [Expense_t / (1 + r)^t]
Key Verdict: Use Net Present Cost (NPC) when evaluating equipment purchases, renewable energy systems, or public works where two alternatives deliver the same benefits and you want to minimize total lifetime expenditure.
Head-to-Head
Payback period reveals how quickly you get your money back, whereas NPV reveals how much total wealth the project will generate over its entire lifespan.
Net Present Value (NPV)NPV = -I_0 + Σ [CF_t / (1 + r)^t]
VS
Payback PeriodPayback = Years until cumulative cash flow = Initial Investment
Key Verdict: NPV and Discounted Payback Period work best as partners: NPV proves long-term profitability, while Payback confirms near-term liquidity safety.
Head-to-Head
Undiscounted payback simply tallies raw cash inflows until initial costs are covered. Discounted payback accounts for the cost of capital, providing a true economic break-even horizon.
Discounted Payback PeriodCumulative PV(t) >= Initial Outlay
VS
Undiscounted (Simple) PaybackCumulative CF(t) >= Initial Outlay
Key Verdict: Always prefer Discounted Payback Period for accurate capital budgeting. Simple payback can lead to false confidence in long-cycle investments.
