• Suresh Jambunathan

Project Basics

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. 






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