IRR vs NPV: Deciding Between Competing Capital Projects
Understand the mathematical trade-offs between Net Present Value and Internal Rate of Return, and how to resolve scale and timing conflicts.
Capital Allocation Decisions: NPV vs IRR
Net Present Value (NPV) and Internal Rate of Return (IRR) are the two primary metrics used in capital budgeting. While both metrics help identify profitable projects, they can lead to conflicting decisions when projects are mutually exclusive due to differences in scale or cash flow timing.
Solving the Reinvestment Rate Dilemma
The conflict arises primarily because NPV assumes cash flows are reinvested at the project's cost of capital, while IRR assumes reinvestment at the IRR itself. For institutional decision-making, NPV is generally considered the superior metric because it uses a more realistic reinvestment rate assumption.
Put This Theory into Practice
Calculate WACC step by step using market-value equity and debt weights, CAPM cost of equity, and after-tax cost of debt. Enter your own inputs to model the weighted average cost of capital for any company. Enter your custom inputs and simulate scenarios in our math-verified WACC Calculator.
Put This Theory Into Practice
Run your own scenario analysis with our math-verified calculators.
