Conflicting Result between NPV and IRR: Which one is better?

Abstract

Both NPV and IRR are popular techniques of capital budgeting. The NPV of a project is exactly the same as the increase in shareholders’ wealth. This fact makes it the correct decision rule for capital budgeting purposes. IRR is the rate of return on invested capital that the project is returning to the firm. Sometimes the NPV and IRR can favor conflicting project choices. Such conflicts may be dealt with by considering the mutuality of the project, value additivity principle ,multiple rates of return and reinvestment rate assumption. In reality, using the IRR method could lead to investment decisions that increase, but do not maximize wealth. Another reason for which IRR approach might not be usable-this is when projects have unconventional cash flow patterns.