However, each indicator supplies important information to evaluators so they both together will provide a better view of the financial behavior of the project.

The NPV measures the value the project creates, "in addition" to the Rate of Return required. It provides an indication, in monetary terms, of the wealth created by the project on the most likely scenario. Before going deeper into the definition it would be good to step back for a second and explain a common misunderstanding regarding the return the project provides, as it is not received on the total investment but rather on the investment that remains unrecovered every period.

For example, let's say an investor has provided 10 MM US$ as initial investment for a project expecting to earn a Rate of Return of 10%, and the project provided him a 2MM US$ free cash flow the first year. In this case, 10 % of the initial investment (1 MMUS$) will cover the expected Rate of Return, and the additional 1 MM US$ would be equivalent to the devolution of capital (just like the amortization of a loan principal). So, in the second year the investment remaining will be 9 MM US$ and the cash flow expected 0.9 MM US$.

Since the investor owns the cash flow during the entire project life, all of this "surplus cash" generated every year is automatically "credited" to the project equity. So, both NPV and IRR give you the return on the "remaining" (internal) investment just like a bank loan does, so in this way the project can be compared with any other investment instruments.

The NPV measures the excess (or shortfall) of cash flows, unlike the IRR that measures the max return that an investor can expect from the project. Thus, while the project NPV can be evaluated for different return rates, there’s only one single IRR associated to each project.

That said, it is evident that the NPV provides the same information as the IRR (whether or not to invest), plus it also gives you supplementary information regarding the additional value created by the project, a critical indicator when comparing mutually exclusive investment alternatives.

However, despite a strong technical preference for NPV and the limitations of the IRR, different surveys indicate that industry practitioners and executives prefer IRR over NPV. It seems that many evaluators still find it intuitively easier to evaluate investments in terms of percentage Rates of Return rather than dollars.

Chapter 16 provides an comprehensive guide to business project cash flows, covering all the topics related to Financial Indicators, Depreciation, Taxes, Working Capital and Discount Rate. You can read the first two chapters of the book here.

Although each investment project is unique and must be treated in a particular manner, the methodologies to take them through from a simple idea to a reliable operational mode can be adapted to face any situation:

A fuel retail company evaluates the creation of a new Natural Gas (NG) Distribution company that will focus on industrial customers. These customers are currently burning propane for their process

Due to the rapid increase of the global demand, an acai berry producer is considering to eliminate his current plantations of other berries and Noni to increase the production of the popular fruit

An electronic equipment manufacturer, is trying to identify the best location for a new plant to assemble MP3 players and smart phones

The Product Development Team of a digital imaging company is working on the development of a newer version of their digital camcorder

The owner of a dairy factory is planning to close one production line due to the continuous demand reduction