What do financial analysts use to compare the relative worth of different investment opportunities?

Financial analysts utilize Net Present Value (NPV) to compare the relative worth of different investment opportunities because NPV provides a comprehensive measure of an investment's profitability. It reflects the present value of cash inflows generated by an investment, discounted back to their present value at a specified rate, minus the initial investment cost. By assessing NPV, analysts can determine whether an investment is expected to yield a positive return or not.

NPV allows for the comparison of various investments, even if they differ in scale and time frames. An investment with a higher NPV indicates a more attractive opportunity, as it signifies a greater increase in value relative to the initial amount invested. Investors can confidently identify which projects are likely to enhance their wealth based on their calculated NPV.

In contrast, the other financial metrics do not provide the same level of insight into the relative worth of investments. The Annual Percentage Rate focuses primarily on comparing different borrowing costs rather than investment returns. The Internal Rate of Return (IRR) is useful but can produce multiple values in non-standard cash flow scenarios and doesn’t account for differences in project scale. Simple Interest is a basic calculation that does not reflect the time value of money, making it less suitable for investment comparison.