NPV vs IRR

Difference Between NPV vs IRR

NPV vs IRR in this article is stated. NPV is the short form used for Net Present Value, whereas IRR is the short form used for the Internal Rate of Return. Net present value or NPV can be defined as a method used to ascertain the present value (P.V.) of upcoming cash flows that can be earned from a particular project. On the other hand, IRR or internal rate of return can be defined as a discount rate that lets the net present value of cash inflows from a particular project equal to 0. The net present value method is generally used for the purpose of evaluating projects that are supposed to continue for a longer period of time, whereas the internal rate of return method is more often used for the purpose of evaluating projects that are supposed to continue for a shorter span of time.

Head to Head comparison Between NPV vs IRR (infographics)

Below are the Top 15 Differences NPV vs IRR:

Key Differences Between NPV vs IRR

The key differences between NPV vs IRR are discussed below:

1. The net present value method is an absolute sum, whereas the return method’s internal rate is a relative sum.
2. If the cash flow changes, the net present value can be taken into use, whereas the internal rate of return cannot be taken into use.
3. If the Net present value of a project is positive, then the same can be accepted. On the other hand, a project in IRR can be accepted if its internal rate of return is higher than its weighted average cost of capital.
4. The net present value method is the PV of cash flows, whereas the internal rate of return method is the discount rate that makes the net present value of cash flow equal to zero.
5. The net present value method can evaluate additional wealth, whereas the return method’s internal rate cannot evaluate additional wealth.
6. The net present value method is a flexible method, whereas the return method’s internal rate is inflexible.
7. In an NPV method, intermediate cash inflows and outflows can be reinvested at a cut-off rate, whereas, in an IRR method, intermediate cash inflows and outflows are assumed to be reinvested at IRR.
8. NPV method is suitable for projects that are supposed to continue for a longer span of time, whereas the IRR method is suitable for projects that are supposed to continue for a shorter span of time.
9. The NPV method considers the rate of interest as a known factor, whereas the IRR method considers the rate of interest as an unknown factor.
10. NPV of a project is determined and expressed as a currency or monetary return, while the IRR of a project is determined and expressed in the form of percentage return.

NPV vs IRR Comparison Table

Let’s discuss the top comparison between NPV vs IRR:

Conclusion

Net present value can be evaluated by calculating the difference between the present value of the cash inflows and the cash outflows’ present value. The net present value takes the time value of money into consideration. The net present value method is used for the purpose of evaluating investment plans or projects where there is a possibility of fluctuations in cash flows.

On the other hand, the internal rate of return method cannot be used to evaluate projects that have fluctuations in cash flows. Net present value is a flexible method, and it can be easily understood by the public at large, whereas the internal rate of return is inflexible, and business managers can only understand it. Net present value can even evaluate additional wealth, while on the other hand, the internal rate of return cannot evaluate additional wealth.

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