Comparison of NPV and IRR in Investment Decisions and Related Practical Applications

Zihan Mi ()
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Zihan Mi: The University of Hong Kong

A chapter in Proceedings of the 2026 11th International Conference on Financial Innovation and Economic Development (ICFIED 2026), 2026, pp 67-76 from Springer

Abstract: Abstract This paper contrasts net present value (NPV) and internal rate of return (IRR) as core discounted cash flow diagnostic indicators for investment decisions, linking their theoretical characteristics to practical evaluations. The study poses three questions: when and why these two standards align; when and why they diverge; and how analysts should construct decisions when diagnostic results conflict. Methodologically, this paper conducts a structured comparative analysis with practical case studies. The cases include: (i) scale conflicts in mutually exclusive choices; (ii) timing conflicts with equal initial expenditures; and (iii) non-normal cash flows with multiple sign changes. Key findings include: NPV is a proper value creation anchor because it aggregates in monetary units and aligns with portfolio selection; IRR remains useful for communication relative to minimum yield but must be interpreted within its mathematical boundaries; robust practice requires evaluating NPV within relevant cost of capital ranges rather than relying on a single rate. This paper provides a clear decision-making framework that coordinates these two metrics and clarifies their most relevant application areas.

Keywords: Net Present Value (NPV); Internal Rate of Return (IRR); Capital Budgeting (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6239-642-5_8

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DOI: 10.2991/978-94-6239-642-5_8

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