A Brief On Economic Analysis

-- Consulting-Specifying Engineer, 3/1/2001

Common economic analysis methods include payback period, discounted payback period, net present value (NPV) and internal rate of return (IRR). Each method involves a comparison of initial capital investment to an estimated value of future expected cash flows. The payback period is the number of years required to recover the original investment. The discounted payback period involves discounting future cash flows by the cost of capital to determine the number of years required to recover the investment from discounted net cash flows. The NPV approach compares the initial investment to the sum of future cash flows. Finally, the IRR is the discount rate at which the present value of expected cash inflows equals the present value of expected cash outflows.