NPV vs IRR: Two Ways to Judge an Investment
Finance · 7 min read · Last updated September 2026
One project, both metrics
Project: invest ₹5,00,000 today; receive ₹2,00,000 per year for 3 years. Required return (discount rate): 10%.
= −500,000 + 181,818 + 165,289 + 150,263
= −500,000 + 497,370 = −₹2,630
This project fails a 10% hurdle. Lower the hurdle to 9% and NPV turns positive (+₹6,240), so IRR sits just under 10% — about 9.7%. That is exactly the relationship: IRR is the discount rate at which NPV = 0. The calculators compute both from your cash flows.
Why they can disagree
| Situation | NPV says | IRR says | Who is right |
|---|---|---|---|
| Small project, huge IRR | +₹5,000 | 60% | NPV — 60% on ₹8,333 is still just ₹5,000 |
| Big project, modest IRR | +₹2,00,000 | 15% | NPV — scale beats rate when capital is available |
| Timing flipped | Depends on discount rate | Unchanged | NPV — only it knows your actual cost of capital |
The root cause: IRR mathematically assumes every intermediate cash flow is reinvested at the IRR. A project with a 60% IRR does not offer you 60% on its payouts — your real reinvestment rate is your savings or borrowing rate, which NPV prices honestly.
The decision rule
Use NPV for the decision; use IRR only as a communication shorthand ("this returns ~15%") or to sanity-check the NPV sign. If two mutually exclusive projects disagree, the higher-NPV one wins. If capital is truly rationed, rank by profitability index (NPV per rupee invested) instead of IRR.
Try the calculators
Worked example: NPV Calculator at its default inputs
Open NPV Calculator and press calculate without editing a field. What comes back is the table and result below, so the npv-vs-irr numbers here are checkable in one click.
| Input | Default |
|---|---|
| Discount Rate (%) | 10 |
| Cash Flows (comma separated) | -10000,3000,3000,3000,3000 |
Result: NPV: $-490.40
The steps behind that answer
- Formula: NPV = Σ CFt / (1+r)^t
- Step 1: Discount rate r = 10% = 0.1
- Step 2: Discount each cash flow:
- ...CF0 = -10000 / (1.1)^0 = -10000
What Discount Rate (%) does to the answer
The table below varies discount rate (%) alone — half, the default, and half again.
| Discount Rate (%) | Result |
|---|---|
| 5 | NPV: $637.85 |
| 10 | NPV: $-490.40 |
| 15 | NPV: $-1435.06 |
Halve discount rate (%) and the result moves one way; add half again and it moves the other. Watching that gap is quicker than guessing which field matters most.
Related guides
The two measures can disagree, and NPV wins
NPV discounts every cash flow at your required rate and reports the value added in money. IRR reports the rate at which NPV would be zero. When a project has unconventional cash flows, the IRR can be multiple or nonexistent, while NPV stays well defined.
For choosing between projects, NPV is the decision rule: a positive NPV at the hurdle rate means the project beats the alternative use of the capital. IRR is a communication tool, useful because it is a percentage.
The reinvestment assumption
IRR implicitly assumes interim cash flows are reinvested at the IRR itself, which is optimistic for a project returning 30%. NPV assumes reinvestment at the discount rate, which is the more defensible assumption.
The gap matters most for long projects with large early cash flows. Modified IRR addresses it by assuming reinvestment at the cost of capital, at the price of one more assumption to explain.
Scale and timing
A small project can show a high IRR and add less value than a larger project with a lower one. Comparing percentages across different sizes hides the difference in absolute money, which is what actually compounds.
Use IRR to rank projects of similar scale, and NPV to decide how much capital to commit.
Frequently asked questions
What is the difference between NPV and IRR?
NPV converts all future cash flows into today’s money using your required return and answers in currency; IRR finds the discount rate that makes NPV exactly zero and answers in percent. They agree on accept/reject for a single conventional project but can rank projects differently.
Why is NPV considered more reliable?
Because it uses your real, achievable reinvestment rate and measures absolute value created. IRR’s math implicitly reinvests intermediate cash flows at the IRR itself, which overstates projects with high rates and ignores project size entirely.
What discount rate should I use?
Your opportunity cost: what the money could otherwise earn at comparable risk — commonly a benchmark return for investments, or a weighted cost of capital for businesses. It is an assumption worth stating, not a constant.
Can IRR be negative or multiple?
Yes to both. A project that never recovers its cost has a negative IRR, and cash-flow patterns that switch sign more than once can have several IRRs — in those cases rely on NPV alone.
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