NPV vs IRR

NPV and IRR are both capital-budgeting tools. NPV tells you the dollar value an investment adds, while IRR tells you the percentage return. They often agree, but NPV is generally more reliable.

Function A

NPV

Finds the present value of future cash flows minus the initial investment.

Function B

IRR

IRR tells you the annual return rate of an investment given its cash flows (initial cost + periodic returns). If IRR exceeds your required return, the investment is worthwhile.

Side-by-Side Comparison

Aspect	NPV	IRR
Output	Net present value in dollars	Internal rate of return as a percentage
Input required	Discount rate and cash flows	Only cash flows
Decision rule	Accept if NPV > 0	Accept if IRR > required rate of return
Reinvestment assumption	Uses the explicit discount rate	Assumes cash flows reinvest at the IRR
Multiple IRRs	Always gives a single value	Can produce multiple solutions for alternating cash flows

When to Use Each

Use NPV

Use NPV when you need a dollar-value measure of value creation and you have a reliable discount rate.

Use IRR

Use IRR when communicating the percentage return of an investment or comparing projects of different sizes.

Verdict

NPV is generally preferred for decision-making because it directly measures value added and avoids the multiple-IRR problem.

Frequently Asked Questions

Can NPV and IRR conflict?

Yes, with non-conventional cash flows or mutually exclusive projects of different scales.

Which is better for ranking projects?

NPV is better for ranking because it reflects absolute value creation.