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Diff Between IRR, NPV..Techniques of Capital Budgeting
Diff Between IRR, NPV..Techniques of Capital Budgeting
Diff Between IRR, NPV..Techniques of Capital Budgeting
While both the IRR and NPV try to do the same thing for a company, there are subtle differences between the two that are as follows. While NPV is expressed in terms of a value in units of a currency, IRR is a rate that is expressed in percentage which tells how much a company can expect to get in percentage terms from a project down the years. NPV takes into account additional wealth while IRR does not calculate additional wealth
If cash flows are changing, IRR method cannot be used while NPV can be used and hence it is preferred in such cases
While IRR gives same predictions, NPV method generates different results in cases where different discount rates are applicable.
Business managers are more comfortable with the concept of IRR whereas for general public, NPV is better for grasping.
Summary of differences.. 1. While the NPV will work better in helping other people such as investors in understanding the actual figures in so far as the evaluation of a project is concerned, the IRR will give percentages which can be better understood by managers. 2. As much as discrepancies in discounts will most likely lead to similar recommendations from both methods, it is important to note that the NPV method can evaluate big long-term projects better as opposed to the IRR
which gives better accuracy on short term projects with consistent inflow or outflow figures.