NPV & IRR

NPV compares how much your total money flow (profits minus costs in a time period) compare to the interest rate. If you didn't commit to a project, you would earn the interest rate on your money, so the NPV is how much over the interest rate you earn.

Where the NPV is how much you earn compared to the risk free interest rate, the IRR is a ratio of your investment cost, to your return on investment.

Think of it this way, the NPV gives you your return in terms of dollars (or whatever currency), the IRR gives your return in in percentage of initial investment while still taking into account the interest rate.

Muthu,

Keith explained it well.

Both are numbers used to categorize projects in a portfolio and then to prioritize them. They might also be tracked during a project and used to decide if to go forward in case of phase-gate decisions.

NPV and IRR are used mainly for projects spanning more than a year, as interest over multiple years is included in the formulas.

For a project budget they play less a role.

The only thing I'd add is that NPV is used either to look at a single project investment or to compare multiple projects whereas IRR could be used to compare with the rate of return the company would achieve by other types of investments (e.g. investing those same funds in the stock market).

Kiron

I think it is difficult to determine an actual value when invested in a project.

Thanks for your explanation