Compare and contrast NPV with IRR as a method of investment appraisal

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Compare and contrast NPV with IRR as a method of investment appraisal

Investment decisions are vitally important to a business because it involves making an outlay of something of economic value, usually cash, which the outlay precedes to benefits. If a wrong decision is made, the effects on the business could be significant and it might also mean closing down the activity and sell the premises at a significant loss. The Internal Rate of Return (IRR) and Net Present Value (NPV) are both methods used in practice by businesses to evaluate investment opportunities (long-term assets, i.e. machineries).

The method of NPV uses the discounting cash flow which recognizes money coming in the firm in the future will be worth less value than the money equivalent they have today.

Reasons could include:

* Interest lost- Any investment opportunity must make you wealthier than the returns that are available from the next-best opportunity. For example, investment in a project, i.e. machineries must have better than those from investing in the bank.

* Risk- A higher rate of return is expected from projects where the risk appears as being higher and thus how large the