The Internal Rate of Return (IRR) versus the Net Present Value (NPV) for Project Appraisal

NPV: provides us with a tool to assess a firm’s cash flow minus the initial investment. But NPV alone is not sufficient to understand whether or not a project meets the firm’s MARR or hurdle rate. Hurdle rate is the minimum rate of return that the firm uses to determine acceptability of the project. For example, if the firm’s hurdle rate is 5%, this means the firm will not invest in any project that have rates of return less than 5%. NPV method uses cash flow and not earnings, but on the contrary it is difficult to predict cash flows and the method assumes a constant discounted rate over the lifetime of the project.

IRR: expresses the rate of return on an investment decision as a percentage. It indicates at what discount rate a project will retain an NPV value of zero. Thus, we can define IRR as the discounted rate that equates the present value of a project’s expected benefits to the present value of the project’s expected costs.

A better analysis would be to use an NPV curve to decide as this shows how NPV and IRR varies for various discounted rate.

NPV is superior metric as it incorporates the concept of EVA... i.e NPV will be positive only when IRR is higher than WACC. Put Simply, IRR is a lop sided metric as it accounts for returns alone without referring to the costs deployed to get the same. Read this for more... http://finaticsonline.com/blog/2010/11/npv_vs_irr_vs_mirr/