Difference Between NPV And IRR

Difference Between NPV And IRR

The main dissimilarities or difference between net present value (NPV) And internal rate of return (IRR) can be pointed out as follows:

1. Meaning

NPV: Estimation of profitability of project or investment by subtracting present value of cash outflow from the present value of cash inflow.

IRR: Estimation of profitability of project or investment with the actual rate of return

2. Full Form

NPV: Net present value

IRR: Internal rate of return

3. Expressed In

NPV: It is expressed in a dollar (monetary value)

IRR: It is expressed in percentage (%)

4. Objective

NPV: It is calculated to know the project surpluses

IRR: It is calculated to know the break even point of cash flows

5. Scope

NPV: It has wider scope because it is easy to calculate and simple to understand

IRR: It has limited scope because it is difficult to calculate and understand

6. Commonly Used

NPV: It is the most commonly used technique of project evaluation

IRR: It is not a commonly used technique

7. Cost Of Capital

NPV: It gives emphasize on cost of capital

IRR: It ignores cost of capital or market rate of interest

8. Decision Rules

NPV: A project with positive NPV is acceptable and vice versa. 

IRR: A project with higher IRR than opportunity cost is acceptable and vice versa

9. Impact Of Discount Rate

NPV: Change in discount rate changes the NPV also

IRR: Change in discount does not influence IRR

10. Change In Cash flow

NPV: Project can be evaluated in case of changes in cash flows

IRR: Project cannot be evaluated in case of change in cash flows

NPV Vs IRR (Comparison Chart)

Basis For Difference	NPV	IRR
Introduction	Estimating profitability by deducting cash outflows with cash inflows	Estimating profitability as per the rate of return
Full Form	Net present value	Internal rate of return
Expressed In	Monetary value	Percentage
Purpose/Objective	Knowing the surplus of the project	Knowing the break even point of cash flows
Scope	Wider	Limited
Commonly Used ?	Yes	No
Cost Of Capital	Gives emphasis	Ignores
Impact Of Discount Rate	Yes	No
Change In Cash Flows	Project can be evaluated	Project cannot be evaluated

I hope this post is helpful to understand the difference between NPV And IRR and to make comparison between them.