What are the differences in the calculations of net present value and internal rate of return

Expert Solution

Sl.no.	NPV	IRR
1	Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.	Internal rate of return (IRR) is a calculation used to estimate the profitability of potential investments.
2	It estimates the future cash flows of the project and discounts them into present value amounts using a discount rate that represents the project's cost of capital and its risk. Next, all of the investment's future positive cash flows are reduced into one present value number. Subtracting this number from the initial cash outlay required for the investment provides the net present value of the Iinvestment.	The project may have a positive NPV, but from a business perspective, the firm should also know what rate of return will be generated by this investment. To do this, the firm would simply recalculate the NPV equation, this time setting the NPV factor to zero, and solve for the now unknown discount rate. The rate that is produced by the solution is the project's internal rate of return (IRR).
3	The NPV method results in a dollar value that a project will produce	IRR generates the percentage return that the project is expected to create
4	The NPV method focuses on project surpluses	IRR is focused on the breakeven cash flow level of a project
5	The presumed rate of return for the reinvestment of intermediate cash flows is the firm's cost of capital when NPV is used	it is the internal rate of return under the IRR method
6	NPV is the more heavily-used method	IRR tends to be calculated as part of the capital budgeting process and supplied as additional information

jeff jeffy answered 2 years ago

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