IRR vs NPV – Which is better to use for Financial Decision-Making?
There are many financial ratios used to determine the right financial decisions. Two of the most commonly used financial ratios are the internal rate of return or known as the IRR and the net present value or also known as the NPV. Both financial ratios are often used to determine the right capital allocation decisions that CFOs, CEOs, managers, or entrepreneurs, etc., considers. Especially for cases such as expanding to a new market, buying properties or equipment, launching new products, and many more situations that requires solid financial decision-making based on a reliable financial analysis.
The major difference between the two is that the NPV tells you the expected value while the IRR tells you the expected return. However, both IRR vs NPV functions as the following:
- uses cash flow as the bases for measuring the performance
- subjective assumptions are used as reference for the financial plans
- considers the time value of money
- offers a clear framework for decision-making
Though there are some similarities to IRR vs NPV, there are, of course, major differences that both have such as:
- The NPV presents a dollar return, on the other hand, the IRR analysis shows a relative percentage return, and hence, it does not capture the dollar impact of a larger project.
- The NPV is often used for valuation use cases while the IRR is focused on investment and return calculation cases.
- The NPV is hard to explain the concept to business owners without a finance background while the IRR is easier to explain.
There are many more differences for both financial rations. To learn more, please read the whole article here: IRR vs NPV in the Context of Financial Decision-Making. You can also download industry-specific financial model templates at eFinancialModels that you can use as a reference to differentiate the IRR to NPV. These templates are ready-made by financial modeling experts with a wide range of know-how and experience when it comes to financial modeling.
- uses cash flow as the bases for measuring the performance
- subjective assumptions are used as reference for the financial plans
- considers the time value of money
- offers a clear framework for decision-making
Though there are some similarities to IRR vs NPV, there are, of course, major differences that both have such as:
- The NPV presents a dollar return, on the other hand, the IRR analysis shows a relative percentage return, and hence, it does not capture the dollar impact of a larger project.
- The NPV is often used for valuation use cases while the IRR is focused on investment and return calculation cases.
- The NPV is hard to explain the concept to business owners without a finance background while the IRR is easier to explain.
There are many more differences for both financial rations. To learn more, please read the whole article here: IRR vs NPV in the Context of Financial Decision-Making. You can also download industry-specific financial model templates at eFinancialModels that you can use as a reference to differentiate the IRR to NPV. These templates are ready-made by financial modeling experts with a wide range of know-how and experience when it comes to financial modeling.
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