I understand IRR returns a percentage and NPV returns a value, but aren’t they both just as good for comparison?
I am confused on when to use each of them?
I understand IRR returns a percentage and NPV returns a value, but aren’t they both just as good for comparison?
I am confused on when to use each of them?
2 Responses to “How Do I Know When To Use Irr Instead Of Npv To Compare Investments?”
NPV will only tell you yes or no, ‘yes’ is it a good investment or ‘no’ is it not. It does not, however, compare alternative investments to see which will maximize your return. Thats what IRR and modified IRR is for.
Just curious do you go to Northeastern and have Sherman as a professor?
I find NPV much more useful. IRR doesn’t really (without trial & error) account for changing cash flows. And it also doesn’t account for the size of the project.
IRR could be useful if you want to compare potential returns of a steady cash flow vs your cost of capital. But you can plug your cost of capital into your NPV calculation as your discount rate and essentially come up with the same comparison.
In short – you’re correct in that they both provide similar comparisons, but NPV provides additional info as well.