Themetrics used by an organization when thinking about capitalinvestment has a substantial impact on both the proposed and selectedprojects. Therefore, in selecting the metrics for evaluating thecapital project, the organization should go for the metrics whichdefine the project and portfolio value such that they support themain goal of the capital investment (Bierman& Smidt, 2012).They should seek to maximize the value of the project. It is alsoimportant to note that the whole process will rely on a combinationof metrics. This is because, the use of various metrics will enablethe organization to have a clear distinction between bad and goodprojects, profitable and non-profitable projects as well as establishtheir levels of exposure to various risks. However, choosing acombination of metrics has its disadvantages. If an organizationchooses the wrong metrics, it is likely to run into losses because ofthe failure in making the right investment decisions (Bierman& Smidt, 2012).
Thenet present value is basically a tool or metric commonly applied incapital budgeting to establish the profitability of a project.Netpresent value is calculated by finding the variance between thepresent value of both the cash inflows and outflows. In case there isa positive net present value, then the project is profitable and thesenior managers of an organization should invest (Bierman& Smidt, 2012).However, if there is a negative net present value, the project willyield a net loss and therefore the managers should not go for it.Whereas, internal rate of return is the rate of interest accrued atthe time when the net present value of particular investment orproject is equated to zero. The internal rate of return is useful tothe senior managers because it gives them alternative options on thetype of investments to make based on their yield. Sensitivity is auseful tool in assessing the risk and return of capital. It helps ininvestors to avoid putting their money in risky investments with lowrates of returns (Bierman& Smidt, 2012).
BiermanJr, H., & Smidt, S. (2012). Thecapital budgeting decision: economic analysis of investment projects.Routledge.