NPV vs IRR — Which Investment Metric to Trust & Why They Fight

Quick answer: NPV asks "does this beat my required return, in today’s money?" and answers in currency; IRR asks "what return does this earn?" and answers in percent. On a single normal project they agree — but when they fight (different sizes, different timing), trust NPV, because IRR silently assumes you can reinvest cash flows at the IRR itself.

One project, both metrics

Project: invest ₹5,00,000 today; receive ₹2,00,000 per year for 3 years. Required return (discount rate): 10%.

NPV = −500,000 + 200,000/1.1 + 200,000/1.1² + 200,000/1.1³
= −500,000 + 181,818 + 165,289 + 150,263
= −500,000 + 497,370 = −₹2,630

This project fails a 10% hurdle. Lower the hurdle to 9% and NPV turns positive (+₹6,240), so IRR sits just under 10% — about 9.7%. That is exactly the relationship: IRR is the discount rate at which NPV = 0. The calculators compute both from your cash flows.

Why they can disagree

Situation	NPV says	IRR says	Who is right
Small project, huge IRR	+₹5,000	60%	NPV — 60% on ₹8,333 is still just ₹5,000
Big project, modest IRR	+₹2,00,000	15%	NPV — scale beats rate when capital is available
Timing flipped	Depends on discount rate	Unchanged	NPV — only it knows your actual cost of capital

The root cause: IRR mathematically assumes every intermediate cash flow is reinvested at the IRR. A project with a 60% IRR does not offer you 60% on its payouts — your real reinvestment rate is your savings or borrowing rate, which NPV prices honestly.

The decision rule

Use NPV for the decision; use IRR only as a communication shorthand ("this returns ~15%") or to sanity-check the NPV sign. If two mutually exclusive projects disagree, the higher-NPV one wins. If capital is truly rationed, rank by profitability index (NPV per rupee invested) instead of IRR.

Limitations: both metrics are only as good as the cash-flow forecasts and the discount rate behind them — a 1% change in the hurdle rate can flip the answer on borderline projects. Non-conventional cash flows (costs after gains) can produce multiple IRRs; in that case IRR is meaningless and NPV still works.

Try the calculators

Frequently asked questions

What is the difference between NPV and IRR?

NPV converts all future cash flows into today’s money using your required return and answers in currency; IRR finds the discount rate that makes NPV exactly zero and answers in percent. They agree on accept/reject for a single conventional project but can rank projects differently.

Why is NPV considered more reliable?

Because it uses your real, achievable reinvestment rate and measures absolute value created. IRR’s math implicitly reinvests intermediate cash flows at the IRR itself, which overstates projects with high rates and ignores project size entirely.

What discount rate should I use?

Your opportunity cost: what the money could otherwise earn at comparable risk — commonly a benchmark return for investments, or a weighted cost of capital for businesses. It is an assumption worth stating, not a constant.

Can IRR be negative or multiple?

Yes to both. A project that never recovers its cost has a negative IRR, and cash-flow patterns that switch sign more than once can have several IRRs — in those cases rely on NPV alone.

About this guide: Written and maintained by CalcProMaster’s developer — an independent site, not a licensed financial advisor or medical professional. Every worked example below was computed by hand and cross-checked with the linked calculator; our editorial policy explains how content is written, tested and corrected.

NPV vs IRR: Two Ways to Judge the Same Investment — and Why They Disagree