1. Fundamental difference between NPV and IRR

Question

Accepted Answer

NPV and IRR are both financial metrics used in investment analysis, but they differ in their approach and interpretation.

Net Present Value (NPV) measures the value of an investment by discounting its future cash flows to their present value.
Internal Rate of Return (IRR) is the discount rate that makes the NPV of an investment equal to zero.
NPV focuses on the absolute value of the investment, while IRR focuses on the rate of return.
NPV assumes reinvestment at the cost of capital, while IRR assumes reinvestment at the IRR itself.
NPV is more suitable for comparing investments of different sizes, while IRR is more suitable for comparing investments with similar sizes and cash flow patterns.

Accepted Answer

IRR and NPV have two different uses within capital budgeting IRR is useful when comparing multiple projects against each other or in situations where it is difficult to determine a discount rate. NPV is better in situations where there are varying directions of cash flow over time or multiple discount rates

Accepted Answer

The NPV method results in a dollar value that a project will produce while IRR generates the percentage return that the project is expected to create Purpose The NPV method focuses on project surpluses while IRR is focused on the breakeven cash flow level of a project