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It's a great trick for approximating a value with mental maths. When my boss says he thinks the team can double revenues over 5 years - I can pretty quickly se

by Ntrails 10y ago

It's a great trick for approximating a value with mental maths. When my boss says he thinks the team can double revenues over 5 years - I can pretty quickly see what sort of year on year growth he's magically assigned. When you're in a goddamned fancy calculator, you do the full form calculation because what the hell. I mean, I don't understand why you'd be deriving NPV from "years to doubling", but you can sure as hell get it exact. (Also, as someone who's never actually invested, do people really judge investments on that number rather than internal rate of return, payback period, etc etc?)

JumpCrisscross 10y ago
> do people really judge investments on that number rather than internal rate of return Internal rate of return (IRR) is the rate at which the net present value (NPV) of a set of cash flows is zero. NPV is, in essence, a scaled IRR. If you have a budget of capital to deploy, NPV is preferred. For example, if you have a $100MM budget with a cost of capital equal to zero and two investment options: a $10MM project yielding 20% and a $100MM project yielding 10%, and you cannot purchase parts, only wholes (see the appeal of securitisation?), then IRR would guide you to the former while NPV to the latter. When dealing with securities or any other sufficiently quantised investment, IRR becomes a good enough approximation.
- Ntrails 10y ago
  I was more referring to "Time to doubling" as a metric for investment analysis, IRR/NPV I am comfortable with academically.
- rahimnathwani 10y ago
  You say IRR is the rate, but not every project has a unique IRR, e.g. if there are negative cash flow periods interspersed with positive cash flow periods. Your assertion about NPV being useful when you have a budget confused me. If you have no budget then NPV is useful. You just do every possible NPV-positive project. If you do have a budget, as in your example, you could not pick between those two projects without considering some missing information (the length of time). You can't just pick the highest IRR project, or the largest project. The NPV of your larger project with a slightly lower yield could be lower than that of the smaller, higher yielding project. Consider if the larger one had a length of 1 month, and couldn't be repeated, whereas the smaller one would take 5 years. Or you could flip it around. The information you gave is not enough to choose, regardless of whether or not you're budget-constrained.
delazeur 10y ago
> Also, as someone who's never actually invested, do people really judge investments on that number rather than internal rate of return, payback period, etc etc? Given that it made the difference between a profitable and unprofitable investment, I'm guessing that whoever was selling the investment just kept fiddling with the payoff metrics until they found a way to make it look attractive.

by Ntrails 10y ago

JumpCrisscross 10y ago

> do people really judge investments on that number rather than internal rate of return Internal rate of return (IRR) is the rate at which the net present value (NPV) of a set of cash flows is zero. NPV is, in essence, a scaled IRR. If you have a budget of capital to deploy, NPV is preferred. For example, if you have a $100MM budget with a cost of capital equal to zero and two investment options: a $10MM project yielding 20% and a $100MM project yielding 10%, and you cannot purchase parts, only wholes (see the appeal of securitisation?), then IRR would guide you to the former while NPV to the latter. When dealing with securities or any other sufficiently quantised investment, IRR becomes a good enough approximation.

Ntrails 10y ago
I was more referring to "Time to doubling" as a metric for investment analysis, IRR/NPV I am comfortable with academically.
rahimnathwani 10y ago
You say IRR is the rate, but not every project has a unique IRR, e.g. if there are negative cash flow periods interspersed with positive cash flow periods. Your assertion about NPV being useful when you have a budget confused me. If you have no budget then NPV is useful. You just do every possible NPV-positive project. If you do have a budget, as in your example, you could not pick between those two projects without considering some missing information (the length of time). You can't just pick the highest IRR project, or the largest project. The NPV of your larger project with a slightly lower yield could be lower than that of the smaller, higher yielding project. Consider if the larger one had a length of 1 month, and couldn't be repeated, whereas the smaller one would take 5 years. Or you could flip it around. The information you gave is not enough to choose, regardless of whether or not you're budget-constrained.

delazeur 10y ago

> Also, as someone who's never actually invested, do people really judge investments on that number rather than internal rate of return, payback period, etc etc? Given that it made the difference between a profitable and unprofitable investment, I'm guessing that whoever was selling the investment just kept fiddling with the payoff metrics until they found a way to make it look attractive.