IRR vs. NPV

Difference Between IRR and NPV

Net Present Value (NPV) and Internal Rate of Return (IRR) are used to calculate the cost of a project and its estimated returns. They are used to indicate whether it is a good idea to invest in a particular project(s) over a period of time (normally more than a year. There are many differences between them.

IRR

This method indicates whether the investments on a project will generate the expected profits or not. Since the IRR rate is in terms of percentage, unless its value is positive any company does not proceed ahead with a project. IRR is the rate of growth of a project. While it is only an approximate value, and the real rates of return might be quite different, in general if a project has a higher IRR, it presents a chance of higher growth for a company.

NPV

NPV is a value that determines the difference between the values of cash inflow and cash outflow of any company at present. NPV determines the value of any project today and the estimated value of the same project after a few years after considering inflation and other factors. The positive value leads to the undertaking of the project, but if it is negative, the project is rejected.