Net Present Value (NPV) is the difference between the present value of cash inflows and
the present value of cash outflows. NPV is used in capital budgeting to analyse the
profitability of a projected investment or project.
NPV = Cash inflows / (1+r) ^n – Cash outflows
Internal rate of return (IRR) is a metric used in capital budgeting measuring the
profitability of potential investments. Internal rate of return is a discount rate that makes
the net present value (NPV) of all cash flows from a particular project equal to zero. the
higher a project’s internal rate of return, the more desirable it is to undertake the project.
IRR is uniform for investments of varying types and, as such, IRR can be used to rank
multiple prospective projects a firm is considering on a relatively even basis.