tools-only Financial Analysis Frameworks
Return on Investment (ROI)
Use when: Evaluating investment profitability, comparing options, marketing effectiveness
Formula
ROI = (Net Profit / Investment Cost) × 100%
or
ROI = ((Final Value - Initial Investment) / Initial Investment) × 100%
Example
Investment: ฿100,000 in marketing campaign
Revenue generated: ฿250,000
Costs (excluding marketing): ฿100,000
Net Profit: ฿250,000 - ฿100,000 - ฿100,000 = ฿50,000
ROI = (฿50,000 / ฿100,000) × 100% = 50%
Strengths & Limitations
| Strengths | Limitations |
|---|---|
| Simple to calculate | Ignores time value of money |
| Easy to understand | Doesn't account for risk |
| Universal applicability | Can be manipulated by timeframe |
Net Present Value (NPV)
Use when: Long-term investment decisions, comparing projects with different timelines
Formula
NPV = Σ (Cash Flow_t / (1 + r)^t) - Initial Investment
Where:
- t = time period
- r = discount rate (cost of capital)
Decision Rule
| NPV | Decision |
|---|---|
| > 0 | Accept (creates value) |
| = 0 | Indifferent |
| < 0 | Reject (destroys value) |
Example
Initial Investment: ฿1,000,000
Discount Rate: 10%
Cash Flows:
- Year 1: ฿300,000
- Year 2: ฿400,000
- Year 3: ฿500,000
NPV = 300,000/(1.1)¹ + 400,000/(1.1)² + 500,000/(1.1)³ - 1,000,000
NPV = 272,727 + 330,579 + 375,657 - 1,000,000
NPV = -฿21,037
Decision: Reject (negative NPV)
Strengths & Limitations
| Strengths | Limitations |
|---|---|
| Considers time value of money | Requires accurate cash flow estimates |
| Accounts for all cash flows | Discount rate selection is subjective |
| Direct measure of value creation | Complex to calculate |
Internal Rate of Return (IRR)
Use when: Comparing projects of different sizes, evaluating investment attractiveness
Definition
IRR is the discount rate that makes NPV = 0
Decision Rule
| If IRR | Decision |
|---|---|
| > Cost of Capital | Accept |
| = Cost of Capital | Indifferent |
| < Cost of Capital | Reject |
Example
If NPV = 0 when discount rate = 15%
And your cost of capital = 10%
IRR (15%) > Cost of Capital (10%)
Decision: Accept
IRR vs NPV
| Situation | Use IRR | Use NPV |
|---|---|---|
| Single project, go/no-go | ✓ | ✓ |
| Comparing different-sized projects | ✗ | ✓ |
| Non-conventional cash flows | ✗ | ✓ |
| Ranking mutually exclusive projects | ✗ | ✓ |
Break-Even Analysis
Use when: Pricing decisions, cost planning, viability assessment
Formula
Break-Even Point (Units) = Fixed Costs / (Price per Unit - Variable Cost per Unit)
Break-Even Point (Revenue) = Fixed Costs / Contribution Margin Ratio
Contribution Margin = Price - Variable Cost
Contribution Margin Ratio = Contribution Margin / Price
Example
Fixed Costs: ฿500,000/month
Price per Course: ฿3,000
Variable Cost per Course: ฿500 (payment processing, support)
Contribution Margin = ฿3,000 - ฿500 = ฿2,500
Break-Even = ฿500,000 / ฿2,500 = 200 courses/month
Break-Even Chart
Revenue/
Cost (฿) │ /
│ / Break-Even
│ / ★ Point
│ / Revenue
│ /
│─────────────── Total Cost
│ Fixed Cost
└────────────────────── Units
Payback Period
Use when: Quick assessment of investment recovery, liquidity concerns
Formula
Simple Payback = Initial Investment / Annual Cash Flow
For uneven cash flows: Count years until cumulative cash flow = investment
Example
Investment: ฿1,000,000
Annual Cash Flow: ฿300,000
Payback Period = ฿1,000,000 / ฿300,000 = 3.33 years
Discounted Payback
Same as simple payback, but using discounted cash flows (accounts for time value).
Financial Metrics Summary
When to Use Each
| Metric | Best For | Limitations |
|---|---|---|
| ROI | Quick comparisons, marketing | Ignores time value |
| NPV | Long-term projects, value creation | Needs discount rate |
| IRR | Comparing returns across projects | Multiple IRR issues |
| Payback | Liquidity concerns, risk assessment | Ignores cash flows after payback |
| Break-Even | Pricing, viability | Assumes linear relationships |
Quick Decision Guide
Question: Should we invest in this project?
Step 1: Calculate Break-Even → Is it achievable?
Step 2: Calculate Payback → Is recovery time acceptable?
Step 3: Calculate NPV → Does it create value?
Step 4: Calculate IRR → Does it exceed our hurdle rate?
All positive → Strong investment candidate
Cost-Benefit Analysis Template
## Cost-Benefit Analysis: [Project Name]
### Costs
| Category | Amount | Timing | Certainty |
|----------|--------|--------|-----------|
| Initial investment | ฿X | Upfront | High |
| Operating costs | ฿Y/year | Ongoing | Medium |
| Opportunity cost | ฿Z | - | Low |
| **Total Costs** | ฿XX | | |
### Benefits
| Category | Amount | Timing | Certainty |
|----------|--------|--------|-----------|
| Revenue increase | ฿A/year | Year 2+ | Medium |
| Cost savings | ฿B/year | Year 1+ | High |
| Intangible benefits | ฿C (estimated) | Ongoing | Low |
| **Total Benefits** | ฿YY | | |
### Summary
| Metric | Value |
|--------|-------|
| Net Benefit (Benefits - Costs) | ฿XX |
| Benefit-Cost Ratio | X.X |
| Payback Period | X years |
| NPV | ฿XX |
| IRR | XX% |
### Recommendation
[Accept/Reject with reasoning]