Comparative Analysis of NPV and IRR in Investment Decision Making

Abstract

With the development of the global economy, enterprises are paying attention to the method of measuring investment projects. In the financial sector, different models represent different aspects of the data. Both IRR and NPV are important metrics in decision making. However, it’s a matter that between NPV and IRR, which method is better for evaluation. Based on the definition of NPV and IRR, this paper analyzes the effects of different methods in different situations. Summarizing the different methods in which different situations are applicable. The study found that both IRR and NPV are helpful for investment decisions in different ways. However, NPV is more concise, can be understood quickly and is widely used. NPV can reflect the overall benefit of the project. IRR is more difficult to understand. In some special conditions IRR rule might make mistakes and the data will be inaccurate. IRR is more limited than NPV, so NPV is a more stable and reliable reference data than IRR in investment decisions. Investors should prioritize the data provided by NPV rule.