# IRR vs. NPV: What's the Difference?

Edited by Huma Saeed || By Sumera Saeed || Updated on October 20, 2023
IRR is the discount rate making NPV zero; NPV is the present value of future cash flows minus initial investment.

## Key Differences

IRR stands for Internal Rate of Return, while NPV stands for Net Present Value. Both are financial metrics used in the analysis of investments, but they approach the evaluation from different perspectives.
Sumera Saeed
Oct 20, 2023
IRR represents the discount rate where the NPV of a series of cash flows equals zero. In contrast, NPV calculates the present value of future cash flows, subtracting the initial investment.
Sumera Saeed
Oct 20, 2023
When considering IRR, it's about finding a break-even rate of return; whereas with NPV, you're determining the monetary value an investment could generate or lose over time.
Sumera Saeed
Oct 20, 2023
One major difference is that IRR provides a percentage indicating an expected return, while NPV provides a dollar amount, showing the anticipated net gain or loss from an investment.
Aimie Carlson
Oct 20, 2023
While both IRR and NPV are valuable tools, they have distinct applications. IRR is often used to compare multiple projects, while NPV helps understand an investment's absolute value.
Harlon Moss
Oct 20, 2023

## Comparison Chart

### Definition

Rate at which NPV is zero.
Present value of cash flows minus initial investment.
Sumera Saeed
Oct 20, 2023

### Measure

Percentage (%)
Dollar amount (\$)
Sumera Saeed
Oct 20, 2023

### Key Focus

Break-even rate of return.
Net gain or loss of an investment.
Sumera Saeed
Oct 20, 2023

### Decision Rule

If IRR > required return, invest.
If NPV > 0, invest.
Harlon Moss
Oct 20, 2023

### Dependency

Can be multiple or none in non-conventional cash flows.
Always provides a unique value for a given discount rate.
Sumera Saeed
Oct 20, 2023

## IRR and NPV Definitions

#### IRR

IRR represents an investment's break-even rate of return.
If we achieve more than the IRR, we're making a profit.
Sumera Saeed
Oct 20, 2023

#### NPV

NPV is the difference between the present value of cash inflows and outflows.
The NPV for this project is \$20,000 positive.
Huma Saeed
Oct 20, 2023

#### IRR

IRR can be seen as the growth a project is expected to generate.
This project's IRR suggests it can grow our investment by 15% annually.
Harlon Moss
Oct 20, 2023

#### NPV

NPV is the present value of future cash flows minus the initial investment.
After factoring in our initial cost, the NPV is still favorable.
Sara Rehman
Oct 20, 2023

#### IRR

IRR is the rate where inflows match outflows in present value terms.
With an IRR of 8%, our inflows and outflows balance out.
Sumera Saeed
Oct 20, 2023

#### NPV

NPV helps assess the expected monetary returns of a project.
An NPV of \$0 means we'll just break even on this project.
Sumera Saeed
Oct 20, 2023

#### IRR

IRR helps compare the profitability of different projects.
Between two projects, the one with the higher IRR is generally more attractive.
Harlon Moss
Oct 20, 2023

#### NPV

NPV can vary based on the discount rate used.
If we change our discount rate, the NPV will adjust accordingly.
Sumera Saeed
Oct 20, 2023

#### IRR

IRR is the discount rate that equates an investment's NPV to zero.
For this project, the IRR is 10%.
Huma Saeed
Oct 20, 2023

#### NPV

NPV determines an investment's profitability in dollar terms.
A positive NPV indicates a potentially good investment.
Sumera Saeed
Oct 20, 2023

## FAQs

#### What does IRR stand for in finance?

IRR stands for Internal Rate of Return.
Sumera Saeed
Oct 20, 2023

#### How does NPV relate to cash flows?

NPV represents the present value of future cash flows minus the initial investment.
Huma Saeed
Oct 20, 2023

#### What does a positive NPV suggest?

A positive NPV suggests that the investment would add value to the firm and is potentially profitable.
Janet White
Oct 20, 2023

#### Is a higher NPV always better?

Generally, a higher NPV indicates a more favorable investment, but context and other factors should also be considered.
Harlon Moss
Oct 20, 2023

#### Can there be multiple IRRs for a project?

Yes, for projects with non-conventional cash flows, there can be multiple IRRs.
Janet White
Oct 20, 2023

#### What is the relationship between IRR and NPV?

IRR is the discount rate that results in an NPV of zero.
Sumera Saeed
Oct 20, 2023

#### Can IRR be negative?

Yes, IRR can be negative if the sum of the discounted cash flows is less than the initial investment.
Sumera Saeed
Oct 20, 2023

#### How is NPV different from present value?

NPV accounts for the initial investment, whereas present value only considers the discounted future cash flows.
Janet White
Oct 20, 2023

#### Which is more sensitive to cash flow timings, IRR or NPV?

IRR is generally more sensitive to cash flow timings than NPV.
Sara Rehman
Oct 20, 2023

#### Why is IRR called the break-even rate of return?

Because it's the rate at which NPV becomes zero, meaning inflows match outflows in present value terms.
Aimie Carlson
Oct 20, 2023

#### What does IRR reveal about an investment?

IRR reveals the expected growth rate or return of the investment.
Sumera Saeed
Oct 20, 2023

#### Can a project be accepted with a negative IRR?

Theoretically, if IRR is less than the required return, the project isn't advised. But, decisions may vary based on other factors.
Sumera Saeed
Oct 20, 2023

#### What's a common benchmark for NPV decisions?

If NPV is greater than 0, the investment is often considered favorable.
Janet White
Oct 20, 2023

#### Are IRR and NPV always consistent in their recommendations?

Not always. They might occasionally give conflicting recommendations, especially with differing project scales or cash flow patterns.
Harlon Moss
Oct 20, 2023

#### How is NPV useful for investment decisions?

NPV provides a tangible dollar amount indicating the net value or loss an investment might generate.
Harlon Moss
Oct 20, 2023

#### Can NPV ever be zero?

Yes, when the present value of cash flows equals the initial investment, NPV is zero.
Sara Rehman
Oct 20, 2023

#### Do IRR and NPV require the same cash flow inputs?

Yes, both IRR and NPV are based on the same series of cash flows from an investment or project.
Aimie Carlson
Oct 20, 2023

#### How does changing the discount rate affect IRR?

It doesn't. IRR is the rate that makes NPV zero and is independent of the chosen discount rate.
Janet White
Oct 20, 2023

#### What happens to NPV if the discount rate increases?

The NPV will decrease as future cash flows are discounted more heavily.
Aimie Carlson
Oct 20, 2023

#### Why might companies prefer IRR over NPV or vice versa?

IRR offers a percentage rate of return, aiding comparisons. NPV provides a dollar value, helping understand absolute profitability.
Sumera Saeed
Oct 20, 2023