Question #57521

Does the assumption concerning the reinvestment of intermediate cash inflow tend to favor NPV or IRR? In practice, which technique is preferred and why?

Expert's answer

The net present value (NPV) is the sum of the discounted cash flows minus the original investment.

The internal rate of return (IRR) on a project is the rate of return at which the projects NPV equals zero.

Both methods are used in calculation, but both of them are used for different purposes, because NPV shows the net value of investment for a given discount rate and IRR shows the discount rate, for which NPV = 0.

The internal rate of return (IRR) on a project is the rate of return at which the projects NPV equals zero.

Both methods are used in calculation, but both of them are used for different purposes, because NPV shows the net value of investment for a given discount rate and IRR shows the discount rate, for which NPV = 0.

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