Difference between NPV and IRR

Difference between NPV and IRR

Key differences between the most popular methods, the NPV - Net present
Value Method and IRR-
internal rate of return Method, include:

• NPV is calculated in terms of currency while IRR is expressed in terms of the percentage return a firm expects the capital project to return;

•  NPV Method is preferred over other methods as it calculates additional wealth

• The IRR Method cannot be used to evaluate projects where there are changing cash flows (e.g., an initial outflow followed by in-flows and a later out-flow, such as may be required in the case of land reclamation by a mining firm);

•  IRR Method - understandability is better and since the concept of returns is stated in percentages and find it easy to compare to the required cost of capital

• Both DCF models( discounted Cash flwo Methods)  the use of the IRR Method can lead to the belief that a smaller project with a shorter life and earlier cash inflows, is preferable to a larger project that will generate more cash.

• Applying NPV using different discount rates will result in different recommendations.