Methods of Investment Analysis: ROI, NPV, IRR

There are different methods of Investment Analysis, among the most well-known are ROI, NPV, and IRR. The choice of one or another will depend on factors such as duration, type of investment, etc.

ROI (Return on Investment) is a static and simple method valid for obtaining a quick analysis of a short-term investment. It is calculated as the quotient between the profit generated before interest and taxes and the value of the investment:

ROI = (Income – Investment) / Investment

It calculates the return on our investment as a percentage. This data will appear in INVERSA in our pending investments:

NPV (Net Present Value) or NPV (Net Capital Value) is a dynamic measure that considers the time value of money. It updates monetary units, that is, it gives us the present value of our future cash flows valued at a specific discount rate. This method measures the overall profitability of an investment project:

IRR (Internal Rate of Return) provides the investment's return in percentage and measures the asset's gain relative to the capital remaining invested at the beginning of each period and not on the initially invested capital.

It is the rate that balances our investment with its expected outcome, so it is calculated by setting the NPV equal to zero:

In INVERSA, we use it in the secondary market, where investors can buy those assets that have already been acquired by other investors who are now seeking liquidity by putting them up for sale:

The IRR in this case will be the return that they will obtain by investing in a specific invoice from the secondary market.

As we can see, each method has its advantages and peculiarities, and its use will be advisable depending on the specific circumstances of each investment.