NPV vs IRR: Which Metric Is Better for Investment Decisions?
NPV answers how many dollars today; IRR answers which rate clears NPV to zero—use both, not either alone.
NPV vs IRR: Which Metric Is Better for Investment Decisions?
Updated June 2026 · ~10 min read
Capital budgeting often pits Net Present Value (NPV) against Internal Rate of Return (IRR). NPV measures absolute dollars created at your chosen discount rate; IRR is the rate that makes NPV equal zero. They use the same cash flows but answer different questions. This guide shows both with identical numbers, lists when each metric misleads, and links to StockCalc calculators. For educational purposes only—not investment advice.
When to lead with NPV vs IRR
- NPV first: you compare projects of different sizes and need dollar impact at your hurdle rate.
- IRR for intuition: you want a percentage hurdle comparable to cost of capital.
- Use both: IRR flags scale blindness; NPV flags reinvestment assumptions.
- Non-conventional flows: multiple sign changes may break IRR—prefer NPV or MIRR.
The formula
NPV = Σ (CF_t / (1+r)^t) − C0 IRR: find r* such that NPV = 0 at r = r*
Choose discount rate r for NPV from opportunity cost and risk. IRR assumes interim flows reinvest at IRR unless you use Modified IRR.
Same project, two lenses (illustrative)
Cash flows
- Initial outlay C0 = $100,000.
- Five annual inflows: $30,000, $32,000, $35,000, $38,000, $40,000.
- Hurdle rate for NPV: 10%.
Results (rounded)
- NPV at 10% ≈ +$18,400 → accept on simple positive-NPV rule.
- IRR solving NPV=0 ≈ 19.4% → also above 10% hurdle in this sketch.
Model NPV in the NPV calculator and IRR in the IRR calculator with your own flows.
Common mistakes
- Ranking projects by IRR when dollar NPV favors a larger lower-IRR project.
- Ignoring multiple IRR solutions when cash flows change sign more than once.
- Assuming interim cash reinvests at IRR without stating that assumption.
- Using IRR alone on mutually exclusive projects of different scale.
- Picking a hurdle rate for NPV that does not match your cost of capital.
Try the calculator
Use the interactive calculator to plug in your numbers and see results instantly—without redoing the math by hand.
Open NPV calculator →FAQ
Which is better, NPV or IRR?
Neither is universally better—NPV shows dollar value at your rate; IRR shows break-even rate. Use both.
Can they disagree?
Yes on scaled or non-conventional projects—NPV is usually preferred for ranking.
What is MIRR?
Modified IRR uses separate reinvestment and finance rates to reduce IRR distortions.
Does StockCalc advise which project to pick?
No—tools mirror your inputs for education only.
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Educational Disclaimer
This article is for educational and informational purposes only and should not be considered investment, financial, tax, or legal advice. Market information may change over time, and readers should verify important details independently before making financial decisions.