When organizations evaluate major investments — whether a new project, acquisition or strategic initiative — they rely on valuation metrics to determine whether the expected returns justify the capital required. Using these metrics, financial professionals are able to compare opportunities, assess risk and ensure investments align with an organization’s financial objectives.

The 2026 AFP Cost of Capital Survey highlights several valuation metrics financial professionals rely on when making investment decisions. Internal rate of return (IRR), net present value (NPV) and return on investment (ROI) rank among the most widely used, with more than 80% of respondents citing them as important in their organizations’ decision-making processes. Additionally, organizations consider complementary metrics that provide additional context on profitability, risk and strategic alignment.

Below are seven valuation metrics commonly used to evaluate investments and guide capital allocation decisions.

1. Net Present Value (NPV)

• What it is: Net present value measures the difference between the present value of an investment’s expected future cash flows and the initial capital required.
• How to calculate it: NPV = Present Value of Future Cash Flows − Initial Investment. Future cash flows are discounted using a rate that reflects the organization’s cost of capital.
• Why it matters: NPV directly measures whether a project is expected to create economic value. A positive NPV indicates the investment is expected to generate returns greater than the cost of capital, while a negative NPV suggests it may destroy value.

2. Internal Rate of Return (IRR)

• What it is: Internal rate of return represents the discount rate that makes the net present value of an investment equal to zero.
• How to calculate it: IRR is the rate that satisfies the following equation: NPV = 0. It is typically calculated using financial models or spreadsheet software.
• Why it matters: IRR allows organizations to compare projects by expressing potential returns as a percentage. If the IRR exceeds the organization’s hurdle rate — i.e., the minimum acceptable return — the project is generally considered financially viable.

3. Return on Investment (ROI)

• What it is: Return on investment measures the profitability of an investment relative to its cost.
• How to calculate it: ROI = (Net Profit / Investment Cost) × 100
• Why it matters: ROI provides a straightforward way to compare the financial performance of different investments. It is commonly used for quick evaluations of projects or initiatives where simplicity and comparability are important. However, ROI does not account for the timing of cash flows or risk, which is why it is often used alongside more sophisticated valuation metrics such as NPV or IRR.

4. Payback Period (Breakeven)

• What it is: The payback period measures how long it takes for an investment to recover its initial cost through generated cash flows.
• How to calculate it: Payback Period = Initial Investment / Annual Cash Flow
• Why it matters: Payback period focuses on liquidity and risk by highlighting how quickly an investment returns the capital committed. While it does not account for the time value of money or long-term profitability, it remains a useful screening tool, particularly for organizations prioritizing faster capital recovery.

5. Return on Invested Capital (ROIC)

• What it is: Return on invested capital measures how effectively a company generates returns from the capital invested in the business.
• How to calculate it: ROIC = Net Operating Profit After Taxes (NOPAT) / Invested Capital
• Why it matters: ROIC helps organizations evaluate whether investments are generating returns above the cost of capital. Because it focuses on the efficiency of capital deployment, ROIC is particularly useful for evaluating long-term investment performance and strategic capital allocation decisions.

6. Strategic (Nonfinancial) Metrics

• What it is: Strategic metrics evaluate the broader organizational impact of an investment beyond financial returns. These may include factors such as market expansion opportunities, competitive positioning, operational efficiency improvements, and risk reduction or regulatory compliance
• How to evaluate it: Strategic metrics are typically assessed through qualitative analysis or scorecards that weigh the strategic benefits of an investment.
• Why it matters: Not all valuable investments generate immediate financial returns. Strategic initiatives — such as entering a new market or strengthening supply chain resilience — may support long-term growth even if their financial impact is less immediate.

7. Recurring Revenue Metrics

• What it is: Recurring revenue metrics track predictable revenue streams generated through subscription-based or contract-based business models. Examples include monthly recurring revenue (MRR) and annual recurring revenue (ARR).
• How to calculate it: Recurring revenue is typically calculated by summing the predictable subscription or contract revenue expected within a defined period.
• Why it matters: Recurring revenue metrics help organizations assess the stability and long-term sustainability of an investment. Businesses with predictable revenue streams often benefit from stronger financial visibility and improved forecasting accuracy.

Strengthening Investment Analysis

Individual valuation metrics provide useful insights; however, when organizations combine multiple perspectives, they make better investment decisions.

• Use complementary metrics. Financial professionals typically evaluate investments using several metrics — such as IRR, NPV and ROI — to balance profitability, risk and timing considerations.
• Incorporate qualitative insights. Strategic factors, competitive positioning and operational benefits often influence decisions alongside financial results.
• Evaluate risk scenarios. Sensitivity analysis and scenario modeling help organizations understand how changes in market conditions or assumptions could affect investment outcomes.

By combining quantitative metrics with strategic analysis, financial professionals can develop a more comprehensive view of an investment’s potential value.