Question

What is IRR and how is different from NPV?

Answer 1

Internal rate of return (IRR) is the rate at which present value of cash inflows equals the initial investment or it is the rate at which the net present value (NPV) of a project is zero. It is used to measure whether any project should be accepted or rejected. If IRR is more than the cost of capital or equity, then the project should be accepted and  if it is lower than the cost of capital, then project should be rejected.

On the other hand Net present value (NPV) of a project is present value of cash inflows minus the initial investment. While calculating the NPV, it is assumed that the cash flows or cash inflows are reinvested at the rate equal to IRR. NPV is different from IRR in the sense that NPV is measured in dollar amount while IRR is measured in percentage. Also, the accepting criteria of NPV is different from IRR. If NPV of a project is positive, then project should be accepted on the other hand if NPV is negative, then project should be rejected.