Comparison Between NPV and IRR: Evaluation of Investment

Abstract

The net present value (NPV) and internal rate of return (IRR) are frequently used criteria for choosing capital investment projects which has been used for long days since they been created. But these two indicators may lead to contrary result in certain situations. This difference caused the debate that last more than a century about which investment deciding methods is better. Naturally, research on the inadequacy of these two methods has also continued for a long time and achieved many results such as a more reliable IRR calculation method - MIRR, the analysis of multiple roots in the IRR calculation in complex cases to determine the final result. This paper gives the brief definitions of NPV and IRR, and how they are calculated. The questions of when to use different investment decision-making methods is also answered in the paper. After that, the advantages and disadvantages of NPV and IRR were analyzed. At the same time, this paper has also fully researched the improvement of the deficiencies of two investment deciding methods. Finally, this paper compares NPV and IRR, and analyzes why these two methods lead to different results in some certain situations and which investment decision methods is relatively better in investment and draw the final conclusion.