I was posed a tough question in a case.
- Our client is considering an investment in a solid business
- This investment gives us 15M in cash flow every year from year 1 to year 10 (total: 150M)
- Initial investment: 100M
1) Which business metric would you use to evaluate this investment? 2) [...] therefore, what's your advice?
My (shaky) answers:
1) Business metric
- I would use NPV (i.e. discounting the cash flows) for a 'r' rate either if we are considering this investment against another one or if we are sure about the 'r' rate.
- I wouldn't use ROI because it doesn't consider time-value and the investment is quite long in time. The same would apply for ROE (it could be interesting if 100M are split between Debt and Equity)
- I would in any case consider pay-back period, but only as an additional information, not as a 'go - no go' driver
Since NPV is > 0, we advise our client to proceed with the investment
(this was a hint after I correctly described the equation: r is 5% --> NPV = 16M with).
How could I have answered in a more 'advanced' o 'finance-savvy' way? Are there any other business metrics I should have suggested?