NPV – IRR Study

Marco Di Mauro

Jun 2022
What are these Financial Indicators for?

• IRR: Internal Rate of Return

• NPV: Net Present Value
• PTP: Pre-Tax Profit
• Profit Margin
• NPV (Profit) Margin
Profit Margin

Source: Investopedia: https://www.investopedia.com/terms/p/profitmargin.asp

But...

Profit Margin does not take into account that money has a different
value at different times!

1$ 1.08 $?
Is it bigger?
Looks like..

Inflation

2022 2023

Source: Investopedia: https://www.investopedia.com/terms/p/profitmargin.asp

Profit Margin and Cash Flow at different times
Is this:
Date Costs Revenues Earnings Comments Earnings=110$ - 100$=10$
1/1/2022 -100$ 0 Upfront Investments
Profit Margin=(110 - 100)/100 = 10%
1/1/2023 0 110$ Revenues at Y2

10$

The same as this?

Date Costs Revenues Earnings Comments Earnings=110$ - 100$=10$

1/1/2022 -100$ 0 Upfront Investments
Profit Margin=(110 - 100)/100 = 10%
1/1/2024 0 110$ Revenues at Y2

10$
Profit Margin (2)
Or is this?
Date Costs Revenues Earnings Comments Earnings=110$ - 100$=10$
1/1/2022 -100$ 0 Upfront Investments
Profit Margin=(110 - 100)/100 = 10%
1/1/2023 0 110$ Revenues at Y2

10$

The same as this?

Date Costs Revenues Earnings Comments

1/1/2022 -100$ 0 Upfront Investments Earnings=50$ + 60 $ - 100$=10$

1/1/2023 0 50$ Revenues at Y2 Profit Margin=(110 - 100)/100 = 10%

1/1/2024 0 60$ Revenues at Y3

10$
Profit Margin (3)

Not really...
Present Value

Discount Rate 10%

Date Costs Revenues Present Value Earnings Comments

1/1/2022 -100$ 0 -100$ Upfront Investments

1/1/2023 0 110$ 110/(100%+10%)= Revenues at Y2

100$
0 (Net Present Value) 10$

Discount Rate 10%

Date Costs Revenues Present Value Earnings Comments

1/1/2022 -100$ 0 -100$ Upfront Investments

1/1/2023 0 50$ 50/(100%+10%)= Revenues at Y2

45.45$
1/1/2024 0 60$ 60/(100%+10%)^2= Revenues at Y3
49.58$
-4.95$ (Negative 10$ (Still positive
Present Value)! earning and positive
margin!)
Why??

Because ultimately “It’s better a muffin today than 2 muffins

tomorrow...”
Today Tomorrow

Better than

Money generally depreciates over time and revenues at future times are worth less than revenues at present times:
- To be willing to lend money today (and promised to recover it in the future), you expect a return (the cost of capital)
- When investing at T0, capital has a cost (interest rate)
- The longer the time capital is held, the higher the cost (interest paid)
NPV – Net Present Value
IRR – Internal Rate of Return
WACC – Weighted Average Cost of Capital
• In Project Financial evaluation, WACC is likely used
as discount rate in Discounted Cash Flow analysis
(NPV, IRR)
• A Project with negative NPV/IRR will likely not
recover the cost of capital the company would invest
at different times during the project, hence the project
would not be profitable