- Suresh Jambunathan
Let's start from the very beginning. Listed below are some of the fundamental terms that I have seen clients use interchangeably.
Simple Payback: Expressed In time units (years, months etc....). It’s the one time Project investment divided by the cumulative cash flow to “break-even”. Cash flow is usually understood to mean the “Earnings before Interest, Taxes, Depreciation and Amortization.... EBITDA”. Useful “sniff test”
Return on Investment (ROI) and Return if Equity (ROE): Expressed as a percentage and Often mixed up. ROI expresses the return on the investment....... regardless of who made the investment.
Return on Equity (ROE): also Expressed as a percentage and ROe expresses the return on the “Equity” fraction of the project investment only. Hence ROE is always equal to or greater than ROI.
IRR: internal Rate of Return is often incorrectly conflated with simple payback. IRR expresses the percentage return of the project over a defined time period (5-10-20-30 years). Payback says nothing about the value of an investment.