Investment Analysis
Investment Analysis answers the ultimate question of Financial Modeling: is this business financially worth investing in? It uses Discounted Cash Flow (DCF) to compare what goes out (the initial investment) with what comes back (the projected free cash flows), bringing everything to present value.
What it's for
A business can have positive Cash Flow and P&L and still not be a good investment — for example, if the return takes too long or is less than investing the same money elsewhere with the same risk. This exercise uses the Minimum Acceptable Rate of Return (MARR), defined in the Financial Assumptions, as a comparison benchmark: it represents the minimum return that would make it worthwhile to take on the risk of this business instead of another alternative.
Just like Cash Flow and P&L, this exercise is entirely calculated — there is no data to fill in here.
The four indicators
Payback — how long (in months) it takes for the initial investment to be repaid by the generated free cash flows. The shorter the period, the faster the invested money returns.
NPV — Net Present Value — the sum of all future cash flows brought to present value (discounted by the MARR), minus the initial investment. A positive NPV means that the project, at the MARR used, creates value.
IRR — Internal Rate of Return — the annual rate of return that the investment effectively provides. Compared with the MARR: if the IRR is above the MARR, the project is considered attractive.
ROI — Return on Investment — the total net return over the projection horizon, as a percentage of the initial investment.
Attractiveness Indicators and DCF Breakdown
Below the four main indicators, the Attractiveness Indicators section shows the components of the calculation: the MARR used, the Initial Investment, the gross sum of Free Cash Flows, and their Total Present Value, leading to the NPV.
The Discounted Cash Flow — Breakdown table is the projection table for this exercise: it shows, for the initial investment (period t=0) and each year of the horizon, the Free Cash Flow for that year, the Discount Factor applied (based on the MARR), the resulting Present Value, and the Cumulative NPV — which makes it visible in exactly which year the project "turns" positive (the payback).
The Free Cash Flow used here is operational: received revenues (net of delinquency) minus Taxes, Direct Costs, Operating Expenses, Personnel, and Debt Service. Capital contributions and received financing are not included in this calculation — they are already reflected in the Initial Investment and the P&L's Financial Result.
Tips
Adjust the MARR in the Financial Assumptions to reflect the actual risk of your business before relying on NPV and IRR — a generic MARR of 20% might be too conservative or too aggressive depending on the industry.
An IRR much higher than the MARR isn't always just good news — it's worth checking if the revenue growth assumptions aren't too optimistic, which artificially inflates these indicators.
Look at the Cumulative NPV by year, not just the final total — a project can have a positive final NPV but take several years to get out of the red, which matters for those evaluating the risk of waiting for that return.
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