Investment Appraisal Template (NPV, IRR, MIRR, Payback)

Investment Appraisal: [Project name]

Financial appraisal of a capital investment for a private-sector organisation: decision and options, incremental cash flows, assumptions register, discount rate (WACC and project hurdle), net present value (NPV), internal rate of return (IRR), modified IRR (MIRR), simple and discounted payback, profitability index (PI), sensitivity, switching values, scenarios, real options and the recommendation. Written as original practice guidance using standard corporate finance methods; public-sector appraisals in the UK follow the HM Treasury Green Book (2026 edition, updated 2026-02-05) and US federal analyses follow OMB Circular A-94 (the 1992 version, reinstated on 2025-04-08). Replace every [bracketed] value and every row marked Example. This is a document format, not financial, investment, tax, legal or accounting advice.

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Contents

1. Decision summary and recommendation
2. Decision context and options
3. Cash flow scope and conventions
4. Assumptions register
5. Discount rate
6. Cash flow forecast
7. Appraisal metrics
8. Sensitivity, switching values and scenarios
9. Risks, real options and non-financial factors
10. Option comparison
11. Benefits baseline and tracking
12. Model reference and checks
13. Glossary and references

1. Decision summary and recommendation

Decision requested: [Approve / Reject / Defer] investment of [currency amount] in [project], to be authorised through capex request [CXR-ID].

Recommendation (Example): approve Option A. It has the highest NPV, it clears the hurdle in the base and upside cases, and the downside case (capex 10% over and savings 20% short) gives a negative NPV of EUR 315.3k. The decision therefore rests on the labour-saving assumption (ASM-004), which is supported by a time-and-motion study and two reference sites. Make release of the final 10% payment conditional on site acceptance and 30 days of stable operation (CON-001 in Capex Request (finance/capex-request)).

2. Decision context and options

2.1 Problem and objective

Describe the problem in operational terms, with numbers from the current state. Example: the Leipzig fulfilment centre ships about 1.1 million orders a year (FY2026, the whole of Corvid's commerce volume; the FY2027 budget assumes 1.2 million) with manual picking. Peak-season overtime and agency staff raise the cost per order by about a third in Q4, and the mispick rate is above the service target. The objective is to cut the cost per order and hold peak capacity without adding floor space.

Link to the strategic priority this supports. Example: PRI-004 "Automate fulfilment" in the FY2027 budget.

2.2 Options

Leasing the equipment is a financing choice, not an investment option: decide first whether the asset is worth having (this appraisal), then compare lease and purchase at the after-tax cost of borrowing in a separate lease-versus-buy analysis.

2.3 Mutually exclusive or independent

State whether options are mutually exclusive (only one can be chosen) or independent. For mutually exclusive options, rank by NPV, not by IRR or PI (see section 10). For independent projects competing for a fixed capital budget, rank by PI within the budget and confirm the combination with the highest total NPV.

3. Cash flow scope and conventions

3.1 Incremental principle

Include only cash flows that change because of the decision, measured against the baseline option:

• Include: capital expenditure, installation and commissioning, changes in operating costs and revenues, changes in working capital, tax effects (including tax relief on depreciation), residual or disposal value, decommissioning costs, opportunity costs of assets the project uses that could otherwise be sold or used elsewhere.
• Exclude: sunk costs (feasibility work already paid), allocated overheads that do not change, accounting depreciation as such (only its tax effect is a cash flow), and financing flows (interest and principal), because the discount rate already prices the cost of finance.
• Treat carefully: cannibalisation of existing revenue, savings that are only "capacity freed" unless the capacity is actually removed or reused, and one-off implementation operating costs (training, process redesign), which are cash costs even though they are expensed.

3.2 Conventions used

Keep the cash flows and the discount rate consistent: nominal flows with a nominal rate, real flows with a real rate, pre-tax flows with a pre-tax rate. Convert a rate between nominal and real with the Fisher relation, not by subtraction, when inflation is material:

3.3 Tax, inflation and FX treatment

Record the tax rate by jurisdiction, any investment incentives or grants (and whether they are conditional), and the timing of tax payments. If flows arise in more than one currency, forecast each in its own currency and convert at forward rates or at a consistent parity assumption; do not mix a EUR discount rate with USD flows. Example: no grants assumed; a regional investment grant was explored and excluded because eligibility was not confirmed (ASM-010).

4. Assumptions register

Confidence scale: High = contract, quote or audited data; Medium = study or benchmark; Low = indication or judgement. Run sensitivity on every Medium and Low input.

5. Discount rate

5.1 Cost of equity and WACC

5.2 Project hurdle rate

Example: CAP-002 is an efficiency project, so the hurdle is 8.0% + 1.0 = 9.0%. Record who sets the premiums and when they were last reviewed; the premiums are a policy choice, and they belong in the capital allocation policy, not in each appraisal.

For public-sector appraisals use the official discount rate instead: the Green Book social time preference rate in the UK (HM Treasury published an independent discount rate review on 2026-06-30; check whether a new rate has been adopted) and the OMB Circular A-94 rates in the US federal government. Current-year A-94 discount rates are issued by OMB memorandum (for 2026, M-26-09 of 2026-03-06, as reported); check the latest memorandum before use.

6. Cash flow forecast

Discount factor for year t at rate r:

Notes on the example:

• Tax each year = 30% x (savings - 350). Year 1: 0.30 x (520 - 350) = 51.0.
• Year 8 terminal items: disposal value 150 less tax 45 (fully taxable) = 105, plus release of spare-parts inventory 100, so 205 in the capex and working capital column. Year 8 net cash flow = 766 - 124.8 + 205 = 846.2.
• Discount factors are shown to four decimals; present values are computed from unrounded factors and agree with the four-decimal factors to within 0.1.

7. Appraisal metrics

7.1 Net present value

Example: sum of present values of years 1 to 8 = 3,337.2; less initial investment 2,900.0; NPV = EUR 437.2k. A positive NPV means the project is expected to return more than the 9.0% required return, by EUR 437.2k in today's money.

7.2 Internal rate of return

IRR is the rate at which NPV equals zero:

Example: IRR = 12.66%, solved iteratively (check: NPV at 12.66% is zero to within EUR 0.1k). IRR is reliable here because the cash flows change sign only once (one outflow, then inflows). Where flows change sign more than once (for example a mid-life overhaul or a decommissioning cost), there can be several IRRs or none: use NPV and MIRR instead.

7.3 Modified internal rate of return

MIRR compounds positive flows forward at a reinvestment rate and discounts negative flows at a finance rate, which removes the multiple-IRR problem and the implied reinvestment at the IRR:

Example: with both rates at 9.0%, the future value of years 1 to 8 inflows at year 8 is EUR 6,649.6k; the present value of outflows is EUR 2,900.0k; MIRR = (6,649.6 / 2,900.0)^(1/8) - 1 = 10.93%.

7.4 Payback and discounted payback

Simple payback is the time until cumulative undiscounted cash flow turns positive; discounted payback uses cumulative present values. Interpolate within the year:

Example: simple payback = 4 + 658.6 / 610.4 = 5.08 years. Discounted payback = 6 + 332.5 / 345.0 = 6.96 years. Both fall within the 8-year life, but discounted payback is close to the end of life, which signals that value depends on the later years.

7.5 Profitability index

Example: PI = 3,337.2 / 2,900.0 = 1.151. Use PI to rank independent projects under a capital constraint, not to choose between mutually exclusive options.

7.6 Metric summary

8. Sensitivity, switching values and scenarios

8.1 One-at-a-time sensitivity

Capital cost changes also change tax depreciation; the model recalculates both. The two illustrative tax rows apply German measures enacted in 2025 (as of 2026-10; confirm with the tax lead before use): a combined rate of 30% less 1.055 points for each point of corporate income tax cut (the solidarity surcharge moves with it), giving 28.95% in 2028 and 24.73% from 2032, with the disposal taxed at the final-year rate; and declining-balance depreciation of 840, 588, 411.6, 288.1, 201.7 and then 156.9 a year, which sums to 2,800. Both raise NPV, together to about EUR 600.3k (IRR 14.23%). The base case keeps the flat 30% rate and straight-line relief because the recommendation does not depend on them: it is conservative to leave them out.

8.2 Switching values

A switching value is the change in one input, holding all others at base, that brings NPV to zero.

8.3 Scenarios

Scenario weights are a judgement; record who set them. A positive probability-weighted NPV with a negative downside means the project is worth doing if the organisation can absorb the downside loss; say so explicitly.

9. Risks, real options and non-financial factors

9.1 Risk register extract

Example: the RSK-002 effect is 10% of year 1 savings (EUR 52.0k) after tax at 30% (EUR 36.4k), discounted with the year 1 factor 0.9174, which gives EUR 33.4k. Tax depreciation is unchanged, so only the savings and their tax move. Replace these figures with your model output.

9.2 Real options

Only include option value in the headline NPV when it is valued with a stated method (decision tree or option pricing) and the inputs are evidenced.

9.3 Non-financial factors

List factors that matter to the decision but are not in the NPV: health and safety (less manual lifting), service quality (mispick rate), employee impact and consultation duties, environmental effects (energy use), data and cyber risk of new control software, and dependency on one supplier. State for each whether it supports or weakens the case.

10. Option comparison

Example OPT-B inputs: capex EUR 1,500k, spares EUR 50k, savings EUR 290k in year 1 and EUR 370k in year 2, then EUR 377k, 385k, 393k, 401k, 409k and 417k in years 3 to 8 (about 2% a year, rounded to whole EUR thousand), disposal value EUR 80k, tax depreciation 1,500 / 8 = 187.5 a year, same tax and discount conventions.

OPT-B has the higher IRR and PI, but OPT-A adds EUR 174.5k more value. The incremental investment of EUR 1,350k earns 12.14%, above the 9.0% hurdle, so the extra capital in OPT-A is worth spending. Choose OPT-A unless capital is rationed so tightly that the EUR 1,350k would earn more elsewhere.

11. Benefits baseline and tracking

Hand the register to the capex request (section 8 of Capex Request) and schedule the post-investment review: Example: 18 months after go-live, with a light check at 6 months.

12. Model reference and checks

Checks performed (tick when done):

• Year 0 equals the valuation date; no flows before year 0 except sunk costs, which are excluded.
• Discount factors recomputed independently for at least three years.
• NPV recomputed from the table with a calculator; IRR checked by discounting at the IRR (NPV equals zero).
• Tax depreciation totals equal the depreciable cost; working capital released in full.
• No interest or loan flows in the cash flows.
• Nominal flows with a nominal rate (or real with real).
• Every input traced to the assumptions register; no hard-coded numbers in calculations.
• Sensitivity and scenario outputs regenerated after the final change.

13. Glossary and references

13.1 Glossary

13.2 References

Standard and licence note

Based on standard corporate finance methods (discounted cash flow, CAPM and WACC) that are not owned by any standard setter, with public-sector context from the HM Treasury Green Book (2026 edition, Crown copyright, Open Government Licence v3.0) and OMB Circular A-94 (US federal work, public domain), both cited by reference only. The FAST Standard (version 02c, CC BY 4.0) and the IFAC appraisal publication are cited by name only; no text from either is reproduced. German tax law is cited by name as public law. Corvid Commerce Group, the project and every figure are fictional. This template is original text written for this collection. Check the current official versions of cited guidance, including the current public-sector discount rates, before use. Template licence: MIT.