NPV vs. IRR: Comparison of Pros and Cons in Investment Decisions

Xinyi Li ()
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Xinyi Li: Beijing University of Technology

A chapter in Proceedings of the 2025 5th International Conference on Enterprise Management and Economic Development (ICEMED 2025), 2025, pp 983-991 from Springer

Abstract: Abstract In the investment decision-making process of modern enterprises, it is critical to analyze project profitability and risk. Numerous techniques have been developed to assist businesses in making logical and scientific investment decisions; the most widely used assessment instruments are internal rate of return (IRR) and net present value (NPV).Although these two methods measure the value of investment projects from different perspectives, there are still differences in their specific calculation methods and application scenarios. Therefore, a thorough comprehension of the parallels and discrepancies between the two approaches can provide a more comprehensive reference for investment decision makers. This study compares and examines the benefits and drawbacks of two approaches to investment evaluation: IRR and NPV, and to explore their applicability in real investment decision projects. Through the combination of theoretical analysis and practical cases, we reveal the influence of NPV and IRR on the decision maker's choice under different project types. The results of this paper show that NPV and IRR have their own unique advantages, and it is of great significance to choose the appropriate evaluation tool for optimizing the capital management of enterprises. Although these two methods are widely used in practice, investors often ignore their limitations or are prone to selection confusion when faced with complex cash flow projects. Therefore, clarifying the core advantages and corresponding disadvantages of these two methods not only helps investors make rational investment choices, but also is crucial for the financial management and risk control of enterprises.

Keywords: NPV; IRR; investment decision; evaluation method (search for similar items in EconPapers)
Date: 2025
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DOI: 10.2991/978-94-6463-811-0_106

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