NPV vs. IRR Discount Rate 0%, NPV

NPV vs. IRR

Discount rate 0%, NPV =$670,000

Discount rate 2%, NPV=$614,400

Discount rate 6%, NPV=$514,820

Discount rate 11% NPV= $409,000

Capital Cost 5%, Modified IRR= 45.6%

Upon plotting these points on a chart an obvious relationship is modeled. The lower the discount rate the higher the NPV appears to manifest. The curve crosses the x axis at a discount rate of .03%.

Rate at 1%, NPV=$65,358

Rate at 4%, NPV= $7,593

Rate at 10%, NPV= -$91,776

Rate at 18%, NPV= -$197,871

Discount rate at X axis = 2.8%

NPV=3,864,000

Anthes (2003) presented some very useful descriptions of the terms net present value (NPV) and internal rate of return (IRR). The article suggested that the NPV and the internal rate of return IRR is defined as two faces of the same coin and both reflect on the anticipated performance of a firm or business over a particular period of time. The main difference is more evident in the method and the units used. While NPV is calculated in cash, the IRR is a percentage value expected in return from a capital project.

Due to the fact that NPV is calculated in currency, it always seems to resonate more easily with the general public as the general public comprehends monetary value better as compared to other values. The IRR method cannot be conclusively used in circumstances where the cash flow is inconsistent. While working out figures in such fluctuating circumstances may prove tricky for the IRR method, it would pose no challenge for the NPV method since all that it would take is the collection of all the inflows-outflows and finding an average over the entire period in focus.

Evaluating the viability of a project using the IRR method could cloud the true picture if the figures on the inflow and outflow remain to fluctuate persistently. It may even give the false impression that a short-term venture with high return in a short time is more viable as compared to a bigger long-term venture that would otherwise make more profits.