There is a strong consensus among pundits and fanatics that the net present value (NPV) is superior to the internal rate of return (IRR) due to many factors (i.e. IRR has much more limitations and it’s not truly wealth accumulation driven), which I will explain in further details later. My aim in this piece of writing is not to convey you of my train of thoughts about these metrics, but rather to explain the advantages, disadvantages between them, and why I believe NPV has far less limitations even though the IRR is one of my favorite friends.
Let’s explain briefly what NPV is then? The net present value is simply the difference between the present value (PV) of all cash inflows and the present value of cash outflows. NPV = (PVinflows – PVoutflows)...Read More