6.8 Cost Comparisons

All of the methods presented in this chapter try to answer the question:  Should we invest?

If there were a clear answer to this question that we could teach you, the world of business would be much simpler. Every time we need to make a decision, we will have to evaluate the criteria given here, as well as look at the risks and rewards.  The concept of risk will be covered more thoroughly in Business Statistics.

Here are the tools we have covered:

  1. PROFIT (Revenue – Costs) – if we do not end up with a profit, then it is useless to evaluate the NPV or IRR.
  2. PAYBACK: How long until we get our original investment back?  When we choose, a shorter payback is preferred.
  3. NET PRESENT VALUE (NPV):  When we evaluate the Profit with interest, is it positive?
  4. INTERNAL RATE OF RETURN (IRR): What is our actual rate of return?

 

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