Investment Appraisal & Valuation (NPV/IRR/EBITDA)
Performs discounted cash flow (DCF) project appraisal, computes Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and EBITDA multiple enterprise valuations.
Computational Framework & Statutory Formulas
NPV = Sum of [CF_t / (1 + r)^t] - Initial Investment
IRR is the discount rate (r) where NPV = 0
Enterprise Value = Normalized Annual EBITDA × Industry Valuation Multiple
Nigerian Economic & Statutory Context
Investment appraisal in Nigeria requires higher hurdle rates (discount rates) to account for high inflation and sovereign risk premia. Projects should typically yield an IRR comfortably exceeding the prevailing commercial bank lending rate to be economically viable.
Frequently Asked Questions (FAQ)
What discount rate should be used for NPV appraisal in Nigeria?
In Nigeria, the discount rate should reflect the company’s Weighted Average Cost of Capital (WACC), which usually incorporates the risk-free rate (Federal Government of Nigeria FGN bonds), equity risk premium, and commercial debt costs, often ranging between 18% and 26%.
Why is Payback Period alone insufficient for project decisions?
The traditional Payback Period ignores the time value of money and cash flows generated after the payback cutoff date. Discounted cash flow metrics like NPV and IRR provide a more comprehensive assessment of economic value creation.