1. Common Allocation Metrics
So let's now discuss the most common capital allocation metrics. First of
all, we've talked about net present value. It is by far the most
used metric for companies in order to select different projects, and remember
that this can be calculated by either using the NPV or XNPV functions
in Excel. Now, we just discussed also the profitability index, and remember
that this is an improvement on the NPV analysis, so the PI,
profitability index can be added to analysis in order to improve on the
NPV. And together the NPV and the profitability index can be used by
companies to make informed decisions about capital allocation.
Now, even though they are less common, let's remember that many companies
also include other metrics. These would include the internal rate of return
or IRR, payback period, and also the discounted payback period.
So what we wanna do next is go back into Excel,
not to perform calculations, but to use some of these metrics to help
us make informed decisions.
2. Let's practice!