Comparison of Net Present Value Model and Internal Rate of Return Model in Investment Decisions

Abstract

The continued operation of a company cannot be separated from the right economic decisions. When making investment decisions, NPV and IRR models are often used due to their excellence. However, the two models sometimes yield different results when comparing and selecting investment projects; After researching the relevant literature, in this article, we give a detailed introduction to the NPV and IRR models, and illustrate the economic implications of the two models. However, in practical applications, the NPV and IRR models do not always produce the same outcomes, and in certain cases, contradictions can arise. This paper analyzes the reasons for the contradiction between the two through case studies, and analyzes the applicability of the two models in order to better apply them. The study found that the IRR model produces inaccurate results because of its own insensitivity to situations when it comes to comparing projects of different sizes, different return patterns or comparing projects of investing and financing. But the NPV model, due to the simple calculation of the indicators, is consistent with the financial management objectives of the enterprise, the investment assumptions are relatively reasonable, and there is no problem of multiple solutions or no solutions. When using the IRR indicator and the NPV indicator, when conflicting results are obtained through the use of the NPV indicator and the IRR indicator, the NPV indicator should be chosen to assess the viability of investment projects.