NPV vs IRR | Similarities and Differences

Similarities of Net Present Value and Internal Rate of Return

The following are some of the similarities between Net Present Value (NPP) & Internal Rate of Return (IRR).

1. Both are modern techniques of capital budgeting.

2. Both are considering the time value of money.

3. Independent investment proposals which do not compete with one another and which may be either accepted or rejected on the basis of a minimum required rate of return. Under these circumstances, both methods gave same results.

4. Conventional investment proposals which involve cash outflows or outlays in the initial period followed by a series of cash inflows. Both methods gave same results under these circumstances.

Differences between Net Present Value and Internal Rate of Return

The following are some of the differences between NPV and IRR.

Net Present Value Method Internal Rate of Return Method
Discount rate is determined by discounting the future cash flows of a project at pre-determined rate i.e. cost of capital or cut off rate. Discount rate is not predetermined under this method. But, this is calculated by trial or error method.
It recognizes the importance of market rate of interest or cost of capital. This method does not consider the market rate of interest but prefer to invest the funds at the maximum rate of interest.
Under this method, it is presumed that the cash inflows are reinvested at the cut off rate or cost of capital. Under this method, it is presumed that the cash inflows are presumed to be reinvested at the internal rate of return.