There are a number of measures that find favour within appraisal for establishing the viability of a potential investment, and for comparing and selecting between (preference) alternative potential (multiple) investments:
• Present worth (PW) • Annual worth (AW) • Internal rate of return (IRR) • Payback period (PBP) • Benefit:cost ratio (BCR)
Each measure tells something different about the investment being considered, but not the whole story. The results of any appraisal have to be viewed in that light. Accordingly, people may evaluate an investment against several of these measures simultaneously (for example present worth, payback period and internal rate of return), and have in-house requirements for each measure before deciding to invest – for example, internal rate of return has to be greater than 10% per annum, and payback period has to be less than 18 months. This chapter outlines the basis of these measures.