NPV vs. IRR: Key Differences & When to Use Each
NPV is the present value of all future cash flows minus the initial investment; IRR is the discount rate that makes NPV exactly zero.
People confuse them because both rank projects, but they answer different questions: “How much money will we make?” versus “What’s the break-even return?”
Key Differences
NPV shows absolute dollar value created; IRR shows percentage return. NPV uses your chosen discount rate; IRR solves for the rate itself.
Which One Should You Choose?
Use NPV when comparing projects with different sizes or timelines. Use IRR for quick “hurdle-rate” checks or when capital markets are the benchmark.
Can IRR be wrong?
Yes. Multiple or negative cash flows can produce more than one IRR, making it misleading.
Do companies ignore NPV?
Some prefer IRR for its simplicity, but most CFOs use NPV for final decisions.