Net Present Value (NPV) & Internal Rate of Return (IRR)

Round 3 Submission – Sajal Gupta

Why study NPV
and IRR?
 Capital budget planning, e.g.
 Choosing between investments
 Deciding whether to fund new
projects

 NPV and IRR are metrics used to

compare the valuation of alternative
cash flows over time.
Net Present Value
(NPV)

Net present value (NPV) is a method used to determine the current

value of all future cash flows generated by a project, including the
initial capital investment.
NPV Decision Rule
Internal Rate of
Return (IRR)

The internal rate of return (IRR) is a metric used in capital budgeting to

estimate the profitability of potential investments. The internal rate of
return is a discount rate that makes the net present value (NPV) of all
cash flows from a particular project equal to zero.
 You can purchase a building for $375,000. The investment will generate
$25,000 in cash flows (i.e. rent) during the first three years. At the end of
three years you will see the building for $450,000. What is the IRR on the
investment ?

Let’s try
NPV vs IRR
NPV is preferred over IRR -

 NPV measures the wealth created today from an

investment today. This is the goal of management.

 IRR does not account for the size of the project

 If money costs 10% , it is better to earn 12%
on a million dollar project than 12% on a
$1000 project

 IRR is not uniquely determined

 IRR may have multiple solutions
 IRR may also have zero solutions