IRR vs NPV
IRR and NPV are the two ways finance teams decide whether an investment is worth making. They use the same cash flows; they answer different questions.
The key difference: NPV tells you how much value the investment creates in today's dollars. IRR tells you the annualised rate of return.
| Dimension | IRR | NPV |
|---|---|---|
| Answers | What return rate breaks even? | How much value is created? |
| Output | A percentage | A dollar amount |
| Best for | Comparing projects of different sizes | Deciding whether a single project clears your hurdle rate |
| Discount rate | Solved for | Chosen up front (cost of capital) |
| Weakness | Can mislead on long-dated or non-conventional cash flows | Sensitive to the discount rate you pick |
When to use IRR
Use IRR when you're ranking investment options against each other and against a hurdle rate.
When to use NPV
Use NPV when you need to know, in dollars, whether a single project is worth doing today.
FAQs
Can NPV and IRR disagree?
Yes. With unusual cash-flow patterns (multiple sign changes, big late inflows) IRR can give two answers or rank projects wrong. NPV is the safer tie-breaker.
Which do PE and VC funds report?
IRR, because LPs care about annualised returns. They'll typically also report multiple of invested capital (MOIC).
What discount rate should I use for NPV?
Your weighted average cost of capital (WACC) for company-level decisions, or the hurdle rate set by your CFO for project-level ones.