Net Present Value (NPV) And Internal Rate Of Return

Net Present Value (NPV) and Internal Rate of Return (IRR) are methods of making capital budget decisions. They are used when choosing between alternate projects and investments, and the main goal is to increase the value of the company or enterprise while at the same time maximizing the shareholder’s wealth. Net Present Value can be defined as the present cash inflows value less the present cash outflows value and it arrives at an amount that has a net benefit to the enterprise.

When computing the NPV and applying the NPV rule, a five-step process is used in solving problems. These rules are;

• Identifying all the cash inflows and cash outflows first

• Determining an appropriate rate of discount

• Using the discount rate to find the present value of all cash inflows and cash outflows

The NPV rule states that “Say yes to a project if the NPV is positive; say no if the NPV is negative.”

The internal rate of return is simply defined as the discount rate that makes NPV zero or NPV=0. It all starts by identifying the cash inflows and outflows, however, IRR does not relay on external data such as discount rate. The internal rate of return rule states that “The projects or investments are accepted when the project’s IRR exceeds a hurdle