The one-sentence difference
- NPV is value created in dollars at a chosen discount rate.
- IRR is the discount rate where NPV equals zero (a percentage).
When NPV beats IRR
- Comparing projects of different scale (NPV captures absolute value).
- Comparing timing differences (early vs late cash flows).
- When cash flows change sign multiple times (IRR can be multiple or undefined).
How to use IRR safely
- Use IRR as a communication metric, not the sole decision metric.
- Always pair IRR with NPV at a realistic hurdle rate (MARR).
- Add a liquidity lens: discounted payback for cash risk.
NPV vs IRR example
Project A: invest $100k to return $140k (NPV +$20k at 10%, IRR 18%). Project B: invest $1M to return $1.3M (NPV +$100k at 10%, IRR 14%). IRR favors A, but NPV shows B creates more value.
Decision checklist
- Is the project mutually exclusive with another option- Use NPV.
- Do cash flows change sign more than once- IRR can be unreliable.
- Is scale material- Prefer NPV for total value created.
- Is liquidity a constraint- Add discounted payback or runway impact.
Common mistakes
- Using an arbitrary discount rate and treating NPV as absolute truth.
- Picking the higher IRR when the lower IRR project creates more value (higher NPV).
- Ignoring reinvestment reality: IRR assumes reinvestment at the IRR, which is often unrealistic.