Choosing Between Two Projects Without Portfolio Math: A Simple Investment Decision Model

⚡ Quick Summary

• This guide shows how to choose between two projects quickly using a simple, cash-first model-no complex portfolio theory required.
• You’ll standardise timelines, discount rates, and metrics so the comparison is clean and defensible.
• Each project is modeled using the same discounted cash flow (dcf) structure, built from incremental cash vs status quo.
• You’ll then apply a small set of capital allocation rules to reach a clear investment decision.
• Non-cash factors (strategy, risk, capability) are layered on after you’ve compared cash outcomes.
• The result: faster, more transparent capital investment decisions that are easy to explain to boards and lenders.

If you’re short on time, remember this: make all projects speak the same cash language before you pick a winner.

💡 Introduction: Why This Topic Matters

CFOs rarely choose projects in isolation. More often, they’re deciding between two competing uses of scarce capital: a new product vs. a new market, automation vs. headcount, or a factory upgrade vs. a new site. These investment decisions often get bogged down in politics, not cash. One sponsor brings a beautiful slide deck; the other has a messy spreadsheet. Without a consistent structure, “best” becomes whoever frames the story better. This guide solves that by providing a simple model for comparing two projects side by side. By standardising capital budgeting assumptions and focusing on incremental cash, you can say, “Here’s which project wins, and here’s why,” in a way that stands up to scrutiny.

🧩 A Simple Framework You Can Use

The framework for comparing two projects is straightforward:

1. Build a consistent incremental cash DCF for each project.
2. Normalise discount rates, horizons, and key factors influencing investment risk.
3. Compare NPV, payback, and downside scenarios side by side.
4. Overlay strategic and operational criteria.
5. Document the investment decision in a short memo.

This pattern scales from SMBs to larger corporate financing environments without introducing complex portfolio optimization. It also plugs into related techniques like incremental cash for upgrade vs outsource and real-options thinking for timing decisions.

🚀 Step-by-Step Implementation

Step 1: Build Comparable DCFs for Each Project

Start by modeling each project separately using your standard single-asset discounted cash flow (dcf) pattern. For both, use the same structure: initial capex, ramp-up, steady-state cash flows, and exit or wind-down. Anchor everything in incremental cash vs status quo, not total revenue or cost. This ensures that when you compare, you’re looking at true value add. Don’t worry yet about picking a winner; your job is to give each project a fair, consistent representation. If you’ve already modeled other business investment decisions in Model Reef, clone the template so your time series and variable types are identical.

Cross-link: For help structuring the base DCFs, revisit the single-asset go/no-go framework.

Step 2: Standardise Assumptions and Discount Rates

Next, harmonise the assumptions that matter for comparability. Use the same base discount rate for both projects, adjusting only if risk differs materially. Align the modeling horizon: if one project has a longer life, account for residual value or expected replacement so you’re not favouring it by default. Standardise tax, inflation, and FX assumptions too. This step turns two separate valuations into a fair head-to-head: any difference in outcome now reflects project quality, not modeling quirks. It also aligns with your broader capital budgeting and capital investment decisions playbook.

Cross-link: For guidance on discount rate choices and scenario work, combine this with your DCF valuation toolkit.

Step 3: Compare Cash Metrics and Downside Resilience

With clean DCFs in place, compare NPV, IRR, payback, and peak cash drawdown across the two projects. Then look beyond the headline numbers: which project holds up better under downside scenarios? Use simple scenario tools to flex key drivers-volumes, prices, capex overruns-and see which project is more fragile. Sometimes, a slightly lower NPV with a gentler downside is the smarter investment decision, especially for SMBs safeguarding runway. Visualise cumulative cash flows on the same chart so the board can see cash troughs and recovery curves at a glance.

Cross-link: For rules of thumb on payback and NPV that work in smaller businesses, see the SMB capital budgeting.

Step 4: Layer on Strategic and Qualitative Filters

Once the cash comparison is clear, add strategic and operational filters. Ask which project reinforces your core strategy, builds defensible capability, or reduces customer or supplier concentration risk. Consider execution risk: do you have in-house skills, or will you rely heavily on third parties? These filters may justify backing a project that is slightly weaker on pure NPV but stronger on strategic fit. Capture this thinking explicitly: “Project A wins on cash; Project B wins on strategic leverage.” This discipline turns investment decisions into well‑reasoned trade-offs, not backroom compromises.

Cross-link: Where the decision is “invest now vs delay”, pull in light real-options thinking to test keep/delay/expand scenarios.

Step 5: Document and Communicate the Decision

Finally, turn the comparison into a short, cash-first decision memo. Summarise key metrics, scenario results, and qualitative filters in a structured format that can be read in minutes. Clearly state the recommendation: Project A, Project B, or defer both and preserve cash. Highlight what would change your mind-e.g., a different funding cost or a shift in market conditions. Attach the underlying models so future reviews can see how assumptions evolved. This memo becomes part of your institutional memory: a record of why capital went where it did, and a benchmark for post‑investment reviews.

Cross-link: Use your “post-investment tracking” process to revisit this decision once cash flows start to land.

📌 Real-World Examples

Imagine a regional logistics business choosing between automating its warehouse or expanding into a new city. Both proposals look attractive in isolation. The CFO builds two comparable DCFs, harmonising assumptions around growth, costs, and discount rates. Automation shows stronger NPV but requires a deeper cash trough early on; expansion has a gentler drawdown but relies heavily on uncertain new revenue. Scenario analysis reveals the expansion project is far more sensitive to volume shortfalls. Combined with strategic filters, automation also reduces error rates and improves working capital. The board picks automation. Twelve months later, actual performance is tracked against the original models, improving the next round of business investment decisions.

⚠️ Common Mistakes to Avoid

A classic mistake is letting sponsors bring wildly different models to the table, one polished, one rough, and judging on presentation quality instead of economics. Another is forgetting to harmonise horizons and discount rates, which can unfairly favour long‑dated or riskier projects. Teams also tend to be overconfident in IRR, which can be misleading when project scale differs; NPV and payback usually tell a clearer story for capital investment decisions. Finally, many organisations fail to revisit choices later; without post‑investment tracking, your investment decisions never get better because feedback is lost. Treat each comparison as an experiment that teaches you how your assumptions perform in the real world.

❓ FAQs

👉 Next Steps

You now have a straightforward model for choosing between two projects without complex portfolio math. Start by standardising your DCF templates so every proposal uses the same structure. Then embed this comparison pattern into your approval workflow: any time two projects compete for capital, they must be modeled and presented in this way. For more nuanced upgrade/replace decisions, combine this approach with incremental cash modeling; for timing and “keep vs delay” questions, bring in simple real-options scenarios. Over time, this will turn your investment decisions from ad‑hoc debates into a stable, cash‑first discipline that the whole leadership team understands and trusts.