NPV, IRR and payback period: is your project profitable before you borrow?
📌 In short: Part VI of the template imposed by Annex V to Executive Decree no. 26-154 requires four indicators: IRR, NPV, break-even point and margin rate. These are not boxes to fill: they are four answers to a single question — does the project create more value than it costs, and from when? This article explains what each indicator measures, how it is calculated, and works them through a complete numerical example, from the initial investment to the decision.
Keywords in this article
1. Four indicators, one question
A project can be useful, well designed and led by a strong team, and still be a poor financial decision. The four profitability indicators exist to settle that point, and nothing else.
| Indicator | The question it answers |
|---|---|
| NPV — net present value | Does the project create value once future money is brought back to today's terms? |
| IRR — internal rate of return | What financing rate can the project bear before it stops being profitable? |
| Payback period | After how long is the initial outlay recovered? |
| Break-even point | From what activity level does the result turn positive? |
These four indicators are expressly required in economic land applications: Part VI of the template in Annex V to Executive Decree no. 26-154 of 14 April 2026 calls for a projected income statement, cash flow statement and balance sheet over three to five years, together with a "profitability analysis" covering IRR, NPV, break-even point and margin rate. We set out that template in our article on the techno-economic study required by AAPI.
📌 The common starting point: cash flows. None of these indicators is calculated on accounting profit. They are calculated on net cash flows — what actually comes in, less what goes out. A project can report an accounting profit while destroying cash; that is precisely what these calculations reveal.
2. NPV: bringing future money back to today
A dinar received in five years is not worth a dinar received today: you have to wait, and waiting has a cost. NPV corrects for that by discounting each future flow, then subtracting the initial investment.
NPV = Σ [ cash flow of year n ÷ (1 + r)n ] − initial investment
where r is the discount rate and n the year number.
How to read the result
- Positive NPV: the project returns more than the required rate. It creates value.
- Zero NPV: the project returns exactly the required rate, no more, no less.
- Negative NPV: the project does not cover the cost of the capital raised, even if it shows an accounting profit.
Choosing the discount rate
This is the most structuring decision, and the least explained in applications. The discount rate represents the minimum return required given the cost of the resources raised and the project's risk. It is generally built from the average cost of financing — bank share and own contribution combined — plus a premium for the specific risk of the activity.
None of the texts we examined sets a regulatory discount rate for these studies. The rate is therefore a matter of the author's judgement — which makes it essential to state and justify it in the study, failing which the NPV cannot be verified.
3. IRR: the rate your project can bear
The IRR is the discount rate that makes NPV exactly zero. It is therefore the project's own return, independent of how it is financed.
Reading it is straightforward:
| Situation | Interpretation |
|---|---|
| IRR > cost of financing | The project supports its financing and generates a margin. Positive NPV. |
| IRR = cost of financing | Exact break-even. No safety margin. |
| IRR < cost of financing | The project does not cover its resources. Negative NPV. |
The gap between the IRR and the actual cost of financing is the project's safety margin: it is what the structure can absorb in rate increases, cost overruns or start-up delays before it tips over.
⚠️ Two limitations to know. The IRR implicitly assumes that the cash generated is reinvested at that same rate, which is rarely the case. And where flows change sign several times — a project requiring heavy reinvestment midway — several mathematically valid IRRs can exist. In both cases, it is the NPV that settles the matter.
4. The payback period: simple, then discounted
The payback period answers the most intuitive question: after how many years is the initial outlay recovered? There are two versions, and the gap between them is instructive.
Simple payback
Cash flows are accumulated year by year until they reach the amount invested. Easy to calculate and easy to grasp — but it ignores the cost of time entirely.
Discounted payback
Flows are accumulated after discounting. Always longer than simple payback, it is the only version consistent with NPV and IRR.
This indicator measures not profitability but risk exposure: the longer the period, the more the project depends on distant, and therefore fragile, assumptions. A banker often reads it before the NPV, because it maps directly onto the tenor of the loan they would grant.
The break-even point, on the same logic
The break-even point completes the picture by reasoning in volume rather than years: it is the activity level at which revenue covers all costs. It maps directly onto the production capacity declared in the technical part of the study — and that cross-check is what gets verified.
5. A complete worked example
The figures below are illustrative: they serve only to show how the calculations follow from one another.
Assumptions. Initial investment of 100,000,000 DA in year 0. Projected net cash flows over five years. Discount rate applied: 12%.
| Year | Net flow (M DA) | Factor at 12% | Discounted flow (M DA) | Cumulative |
|---|---|---|---|---|
| 1 | 18.00 | 0.8929 | 16.07 | 16.07 |
| 2 | 26.00 | 0.7972 | 20.73 | 36.80 |
| 3 | 32.00 | 0.7118 | 22.78 | 59.58 |
| 4 | 34.00 | 0.6355 | 21.61 | 81.18 |
| 5 | 36.00 | 0.5674 | 20.43 | 101.61 |
The four results
| Indicator | Calculation | Result |
|---|---|---|
| NPV at 12% | 101.61 − 100.00 | +1.61 M DA |
| IRR | NPV = +1.61 at 12%; NPV = −1.14 at 13% | ≈ 12.6% |
| Simple payback | Undiscounted cumulative: 18 · 44 · 76 · 110 → between years 3 and 4 | ≈ 3.7 years |
| Discounted payback | Discounted cumulative: 81.18 at year 4, 101.61 at year 5 | ≈ 4.9 years |
What these four figures say together
The project is profitable, but only just. NPV is positive, so it creates value at the required rate. But an IRR of 12.6% leaves only 0.6 points of margin above the discount rate applied: a rise in the cost of financing, a 5% overrun on the initial investment or a one-year delay in start-up is enough to push NPV negative.
The discounted payback of nearly five years confirms that reading: profitability rests on the year 4 and year 5 flows, that is, on the least certain assumptions. Such an application is not one to reject — it is one to strengthen, either on the initial investment or on the first two years' flows.
Do your four indicators hold together?
We build the financial model on your real data, test the sensitivity of the assumptions, and align the results with the technical part of the study.
Have my profitability calculated →6. The six most frequent calculation errors
Observations from our practice preparing and reworking studies, not regulatory provisions.
- Calculating on accounting profit instead of cash flows. Depreciation charges do not leave the bank account; changes in working capital do. Confusing the two distorts all four indicators at once.
- Failing to justify the discount rate. An unexplained rate makes the NPV unverifiable. It must be linked to the actual cost of the resources set out in the financing plan.
- Omitting working capital from the initial investment. This is the costliest omission: it understates the outlay and mechanically flatters the payback period.
- Ignoring residual value at the end of the horizon. Over five years, equipment retains value. Omitting it penalises the project; overstating it makes it suspect.
- Presenting a break-even point incompatible with production capacity. If break-even assumes a utilisation rate higher than the one stated in the technical study, the inconsistency is visible without any calculation.
- Not testing sensitivity. A single set of assumptions says nothing about the project's robustness. Varying the selling price, input costs and start-up date immediately reveals where the structure breaks.
This article presents a calculation method and an example using illustrative figures; it constitutes neither investment advice, nor a recommendation to undertake a project, nor a guarantee of results. Any decision must rest on the company's real data and on the financing terms actually obtained.
FAQ — Frequently asked questions
🔎 Sources and references
- Executive Decree no. 26-154 of 14 April 2026 amending and supplementing Executive Decree no. 23-487 of 28 December 2023 — Annex V, techno-economic study template, Part VI "Economic and financial projections" — Official Gazette of the Algerian Republic no. 31 of 28 April 2026 · Verified on 01/08/2026
- Law no. 22-18 of 24 July 2022 on investment — Official Gazette of the Algerian Republic · Verified on 01/08/2026
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