NPV Vs IRR - Which Is Better - WallStreetMojo

4/9/2019 NPV vs IRR - Which is Better?
- WallStreetMojo
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Financial Modeling NPV vs IRR
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vs Interest NPV vs IRR – Planning to make an investment decision? Confused
Rate how to know its pro tability? Well there are two most important
(https://www. approaches which are used and they are NPV (Net Present Value)
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com/mortgage
-apr-vs-
Let assume that your organization has asked you to do an analysis –
interest-rate/)
Whether the new project will be bene cial?
In this scenario you would rst analyze the project cost and try to
https://www.wallstreetmojo.com/npv-vs-irr/ 1/26
4/9/2019 NPV vs IRR - Which is Better? - WallStreetMojo
In this scenario, you would rst analyze the project cost and try to
evaluate its cash in ows and out ows (Free cash ows
Financial Modeling
(https://www.wallstreetmojo.com/free-cash- ow- rm-fcff/)) . Next
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The most common tool used is NPV & IRR. Both the tools are
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majorly used to evaluate the pro ts from the investments and they
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 both have their own pros and cons. But the primary question is –
com/opportunit
y-cost-
Which tool NPV or IRR is better? There are lot of debate you must
formula/) have read which states NPV is better measurable tool well other
states IRR. In this article, I will be guiding you through the difference
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Most Important – Download NPV vs IRR Excel Template
Mortgage APR NPV and IRR Excel Calculation Example
vs Interest
Rate

(https://www.
 wallstreetmojo. Please go through the infograph of NPV vs IRR to know the

com/mortgage
difference between net present value and internal rate of return.
-apr-vs-
Reading Time: 90 seconds
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Mortgage APR
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Cost Volume
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Cost Formula
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Mortgage APR
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bene t-
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Cost Volume
Pro t Analysis
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Opportunity
Cost Formula
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y-cost-
formula/)
Mortgage APR
vs Interest
Rate
(https://www.
 wallstreetmojo.
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interest-rate/)
o.com/)
bene t-
analysis/)
Cost Volume
Pro t Analysis
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Opportunity
Cost Formula
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y-cost-
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Mortgage APR
vs Interest
Rate
(https://www.
 wallstreetmojo.
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interest-rate/)
o.com/)
bene t-
analysis/)
Cost Volume
Pro t Analysis
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volume-pro t-
analysis/)
Opportunity
Cost Formula
(https://www.
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
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y-cost-
formula/)
Mortgage APR
vs Interest
Rate
(https://www.
 wallstreetmojo.
com/mortgage
-apr-vs-
interest-rate/)
(https://cdn.wallstreetmojo.com/wp-content/uploads/2015/09/NPV-
v s IRR365KB jpg)
v-s-IRR365KB.jpg)
o.com/)
bene t-
analysis/) Advantages and Disadvantages

Cost Volume of NPV
Pro t Analysis
(https://www.
wallstreetmojo.
Net Present Value is the calculation of present value of cash in ows
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minus present value of cash out ows, where present value de nes
volume-pro t-
what will be the worth of future sum of money as of today.
analysis/)
Opportunity If you are investing in certain investments or projects if it
Cost Formula produces positive NPV or NPV>0 then you can accept that
(https://www. project this will show the additional value to your wealth.
wallstreetmojo. And in case of negative NPV or NPV<0, you should not accept
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y-cost-
formula/)
Advantages of NPV
Mortgage APR
Time Value of Money is given more importance i.e. value of
vs Interest
money today is more than the value of money received a year
Rate
from now.
(https://www.
Projects pro tability & risk factors are given high priority.
 wallstreetmojo.
com/mortgage
-apr-vs-
It helps you to maximize your wealth as it will show are your
interest-rate/)
returns greater than its cost of capital or not.
It takes into consideration both before & after cash ow over
the life span of a project.
o.com/)
Disadvantages of NPV
bene t-
analysis/) It might not give you accurate decision when the two or more
projects are of unequal life.
Cost Volume
Will not give the clarity how long a project or investment will
Pro t Analysis
generate positive NPV due to simple calculation.
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NPV method suggests to accept that investment plan which
wallstreetmojo.
 provides positive NPV but it doesn’t provide accurate answer at
com/cost-
volume-pro t- what period of time you will achieve positive NPV.
analysis/) Calculating appropriate discount rate for cash ows is dif cult.
Opportunity
Cost Formula
Advantages and Disadvantages
of IRR
(https://www.
wallstreetmojo.

com/opportunit
y-cost-
formula/)
You can use this approach as an alternative method to NPV. This
method entirely depends on estimated cash ows as it is a discount

Mortgage APR
rate which tries to make NPV of cash ows of a project equal to zero.
vs Interest
Rate If you are using this method to make a decision between two
(https://www.
projects, then accept the project if the IRR is greater than the
 wallstreetmojo. required rate of return.
com/mortgage
-apr-vs-
interest-rate/) Advantages of IRR

This approach is mostly used by nancial managers as it is
di t f it i f th t
expressed in percentage form so it is easy for them to compare

to the required cost of capital.
It will provide you an excellent guidance on a project’s value
o.com/)
bene t- and associated risk.
analysis/) IRR method gives you the advantage of knowing the actual
returns of the money which you invested today.
Cost Volume
Pro t Analysis
(https://www. Disadvantages of IRR

wallstreetmojo.
 IRR tells you to accept the project or investment plan where the
com/cost-
IRR is greater than weighted average cost of capital but in case
volume-pro t-
if discount rate changes every year than it is dif cult to make
analysis/)
such comparison.
Opportunity
If there are two or more mutually exclusive projects (they are
Cost Formula
the projects where acceptance of one project rejects the other
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projects from concern) than in that case too IRR is not effective.
wallstreetmojo.

com/opportunit

y-cost-
formula/)
Mortgage APR
NPV vs IRR Example
vs Interest
Rate
(https://www. XYZ Company planning to invest in a plant, it generates the following

cash ows.From the above information calculate NPV & IRR & the
 wallstreetmojo.
com/mortgage discounting rate is 10%. And suggest whether the XYZ Ltd. Should
-apr-vs-
invest in this plant or not.
interest-rate/)
You can download the excel example – NPV vs IRR Calculation

(https://cdn wallstreetmojo com/wp content/uploads/2015/09/NPV
vs-IRR-Calculation.xlsx)
o.com/)
bene t- NPV Formula
analysis/)
Cost Volume
Pro t Analysis
(https://www.
Formula.jpg)
wallstreetmojo.

com/cost-
Where:
volume-pro t-
analysis/) CF = Cash in ow, r = discount rate, t = time
Opportunity
Cash out ow = total project cost
Cost Formula
(https://www.
wallstreetmojo. NPV Step 1 – Project the Cash Flows, Expected


com/opportunit
discount Rate and apply the NPV formula in
Excel
y-cost-
formula/)
Mortgage APR
vs Interest
Rate
(https://www.
 wallstreetmojo.
com/mortgage
-apr-vs-
interest-rate/)
o.com/)
bene t-
analysis/)
Cost Volume
Pro t Analysis
(https://www.
wallstreetmojo.

com/cost- (https://cdn.wallstreetmojo.com/wp-content/uploads/2015/09/NPV-
volume-pro t- step-1.png)
analysis/)

Opportunity
Cost Formula
NPV Step 2 – Add the Cash Out ow to the
(https://www.
NPV Formula
wallstreetmojo.

com/opportunit
y-cost-
formula/)
Mortgage APR
vs Interest
Rate
(https://www.
 wallstreetmojo.
com/mortgage
-apr-vs-
interest-rate/)
o.com/)
bene t-
analysis/)
Cost Volume
Pro t Analysis
(https://www.
wallstreetmojo.

com/cost-
volume-pro t-
analysis/)
Opportunity (https://cdn.wallstreetmojo.com/wp-content/uploads/2015/09/NPV-
Cost Formula Step-2.png)
(https://www.
wallstreetmojo.

com/opportunit
y-cost- NPV Step 3 – Sum total to nd the Net Present

formula/) Value
Mortgage APR
vs Interest
Rate
(https://www.
 wallstreetmojo.
com/mortgage
-apr-vs-
interest-rate/)
o.com/)
bene t-
analysis/)
Cost Volume
Pro t Analysis
(https://www.
wallstreetmojo. (https://cdn.wallstreetmojo.com/wp-content/uploads/2015/09/NPV-

com/cost- Step-3.png)
volume-pro t-
analysis/) IRR Formula
Opportunity
Cost Formula
(https://www.
(https://cdn.wallstreetmojo.com/wp-content/uploads/2015/09/IRR-
wallstreetmojo.
 Formula.jpg)
com/opportunit
y-cost-
Where:
formula/)
CF = Cash in ow, t = time

Mortgage APR
vs Interest
Rate IRR Step 1 – Populate the Cash Flows

(https://www.
 wallstreetmojo.
com/mortgage
-apr-vs-
interest-rate/)
o.com/)
bene t-
analysis/)
Cost Volume
Pro t Analysis
(https://cdn.wallstreetmojo.com/wp-content/uploads/2015/09/IRR-
(https://www.
wallstreetmojo.
Step-1.png)

com/cost-

volume-pro t-
analysis/)
Step 2 – Apply the IRR formula
Opportunity
Cost Formula
(https://www.
wallstreetmojo.

com/opportunit
y-cost-
formula/)
Mortgage APR
vs Interest
Rate
(https://www.
 wallstreetmojo.
com/mortgage
-apr-vs-
interest-rate/)
o.com/)
bene t-
analysis/)
Cost Volume
Pro t Analysis
(https://www.
wallstreetmojo.

com/cost-
volume-pro t-
analysis/)
Opportunity (https://cdn.wallstreetmojo.com/wp-content/uploads/2015/09/IRR-
Cost Formula Step-2.png)
(https://www.

wallstreetmojo.

com/opportunit
y-cost-
formula/)
Mortgage APR
vs Interest
Rate
(https://www.
 wallstreetmojo.
com/mortgage
-apr-vs-
interest-rate/) Step 3 – Compare the IRR with the Discount

Rate
o.com/)
bene t-
analysis/)
Cost Volume
Pro t Analysis
(https://www.
wallstreetmojo.

com/cost-
volume-pro t-
analysis/)
(https://cdn.wallstreetmojo.com/wp-
Opportunity content/uploads/2015/09/IRR-Step-3.png)
Cost Formula
From the above calculation, you can see that the NPV
(https://www.
generated by the plant is positive and IRR is 14% which is
wallstreetmojo.
 more than the required rate of return
com/opportunit
This implies when the discounting rate will be 14% NPV will
y-cost-
become zero.
formula/)
Hence, XYZ company can invest in this plant.
Mortgage APR
vs Interest
Rate Conclusion
(https://www.
 wallstreetmojo.
com/mortgage
-apr-vs-
As I can conclude that if you are evaluating two or more mutually
interest-rate/)
exclusive projects so better go for NPV method instead of IRR
method. It is safe to depend on NPV method for selecting the best
investment plan due to its realistic assumptions & better measure of
(https://www.wallstreetmojpro tability. Even you can make use of IRR method it is a great
o.com/) complement to NPV and will provide you accurate analysis for
bene t- investment decisions. Also, NPV nds its usage in DCF Valuations
analysis/)
(https://www.wallstreetmojo.com/mistakes-in-discounted-cash-
Cost Volume ows-dcf/) to nd the present value of Free Cash Flows to rm.
Pro t Analysis
(https://www.
NPV vs IRR Video
wallstreetmojo.

com/cost-
NPV vs IRR - Find Out Which is Better?
volume-pro t-
analysis/)
Opportunity
Cost Formula
(https://www.
wallstreetmojo.

com/opportunit
y-cost-
formula/)
Mortgage APR
vs Interest Useful Posts

Rate
(https://www.
NPV Formula (https://www.wallstreetmojo.com/npv-in-
 wallstreetmojo. excel/)
com/mortgage
-apr-vs-
Payback Period Formula
interest-rate/)
(http://www.wallstreetmojo.com/payback-period-
discounted-payback-period/)
NPV XNPV in Excel
(https://www.wallstreetmoj (http://www.wallstreetmojo.com/npv-vs-xnpv/)
o.com/) What is Breakeven Point?

bene t- (http://www.wallstreetmojo.com/break-even-point/)
analysis/)
Time Value of Money in Excel
Cost Volume (http://www.wallstreetmojo.com/time-value-money/)
Pro t Analysis Sensitivity Analysis Excel Example

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wallstreetmojo. excel-with- nance-examples/)
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volume-pro t- (http://www.wallstreetmojo.com/ nancial-functions-in-
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excel/)
Opportunity Financial and Excel Modeling

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wallstreetmojo. Excel Financial Model Types
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 Investment
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4/9/2019 NPV vs IRR - Which is Better?

Pro t Analysis  (https://www.wallstreetmojo.com/net-present-value-npv-

vs Interest NPV vs IRR – Planning to make an investment decision? Confused

 wallstreetmojo. and IRR (Internal Rate of Return).

wallstreetmojo. pro tability of the project.

(https://www.  Popular Course in this category

Financial Modeling Course

LBO Modeling Course (https://www.wallstreetmojo.com/lbo-

Mortgage APR NPV and IRR Excel Calculation Example

 wallstreetmojo. Please go through the infograph of NPV vs IRR to know the

analysis/) Advantages and Disadvantages

Opportunity If you are investing in certain investments or projects if it

It takes into consideration both before & after cash ow over

the life span of a project.

volume-pro t- what period of time you will achieve positive NPV.

method entirely depends on estimated cash ows as it is a discount

interest-rate/) Advantages of IRR

expressed in percentage form so it is easy for them to compare

(https://www. Disadvantages of IRR

(https://www. XYZ Company planning to invest in a plant, it generates the following

You can download the excel example – NPV vs IRR Calculation

wallstreetmojo. NPV Step 1 – Project the Cash Flows, Expected

y-cost- NPV Step 3 – Sum total to nd the Net Present

CF = Cash in ow, t = time

Rate IRR Step 1 – Populate the Cash Flows

Cost Formula Step-2.png)

interest-rate/) Step 3 – Compare the IRR with the Discount

investment plan due to its realistic assumptions & better measure of

vs Interest Useful Posts

NPV XNPV in Excel

o.com/) What is Breakeven Point?

Cost Volume (http://www.wallstreetmojo.com/time-value-money/)

Pro t Analysis Sensitivity Analysis Excel Example

Opportunity Financial and Excel Modeling

O ALL IN ONE  Financial Modeling

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