How do you assess the financial viability and profitability of a project using NPV, IRR, and ROI?

ROI, Return On Investment, is a term that people often throw around but mean different things. If a sophisticated commercial real estate professional or developer is asking you what the ROI is they likley are using the term simialr to asking you what the total cash on cash return will be. Meaning: what is the percetage if you divide all the projected net profits over the project's life by total upfront investment. This might be a 200% cash-on-cash ROI. Others who ask you to calculate ROI may mean the annual simple interest rate of return. As in, what's the percentage if you divide each year's net profit by the inital investment. Could be 12%. Just confirm what they mean before you calculate.

In simple terms, it's a way to figure out how much an investment is worth right now, taking into account all the money it will bring in or cost over time, and adjusting for the fact that money today is worth more than money in the future. Tip 1: If a project's NPV is negative it destroy's value, if its positive it creates value. Tip 2: If your project is a cost center (like a lease), its about finding the lower NPV. As they will always be negative. Tip 3: Every company's discount rate is different. If the company doesn't have one or you can't source it. Use the cost of acquiring capital as your opportunity cost. (hence the cost of a loan for that money)

Great explanation of how to calculate ROI! It is important to have this calculation and to make sure it is accurate. This is a crucial factor to your deals!

we assess financial viability using NPV, IRR, and ROI: NPV: Calculates net gain/loss of cash flows. Positive NPV = profitable project. IRR: Finds discount rate making NPV zero. IRR > cost of capital = viable project. ROI: Measures profitability percentage. Higher ROI = attractive investment. However, over-reliance on these metrics can be risky. They may not capture complexities like market volatility or regulatory changes. Balance with qualitative analyses and remain adaptable to changing circumstances.

While I am a great supporter of using financial metrics, there is a significant risk for over-reliance! IRR, NPV and ROI while valuable, may not fully capture the complexities and uncertainties of real-world investment. For instance, they often fail to adequately account for external factors like market volatility, regulatory changes, or technological advancements. This over-reliance could lead to misguided decision-making if these metrics are viewed as the sole indicators of a project's viability or success. It's crucial to balance them with thorough qualitative analyses and to remain adaptable to changing circumstances and new information.

Add a qualitative analysis with the factors that add or substract risk to the transaction. Add relative weight to each concept and create a matrix to compare how these qualitative variables add to the equation.