Internal Rate of Return is more superior than NPV because NPV is having some some limitations.

NPV -- более общий критерий, чем IRR, так как IRR имеет некоторые ограничения для его использования.

NPV for a multitude of reasons including the fact that It will always provide a single answer, but IRR may provide one, none, or multiple answers.

By the way, the first (above) answer to your question are garbage, and the second is vague bordering on garbage..

NPV is the simplest and best method for reasons that you take given market interest rate for matching expenditure and discounted inflows, as market interest rate is always higher and thereby gives NPV value which considers market factors. Because market rate always reflect current changes and hence NPV will represent fair value.

Internal Rate of Return (IRR) uses hit and trial method of determining discounted value of investment. U have to arbitrarily take a interest rate which may not reflect market situations.

Umar's answer also contains garbage. For example; what does "market rate is always higher" mean"? Higher than what? IAdditionally, the discount rate employed should be the firm's risk-adjusted cost of capital, not a given market rate.The IRR is the discount rate which makes the project's NPV equal zero. If Umer's is trying to say in his last sentence that the reinvestment rate assumption that is assumed in calculating the IRR may be too high; he did a poor job in explaining it.

Thank you @James E. Larsen for correction.

As far as I'm aware from my Economics Bachelor's studies, the NPV technique is better than IRR. The main reasons are:

1. The NPV uses the business' cost of capital as a discount rate, while IRR doesn't.

2. The NPV technique uses the same discount rate (cost of capital) to evaluate different investment plans, while IRR technique uses a different discount rate for each plan, the IRR.

3. The IRR technique uses the trial and error procedure, which may lead to wrong result if it doesn't be used properly, since it assumes that the relationship between the discount rate and the NPV is linear, which is false.

4. The IRR technique may provide more than one solutions, and hence

5. If you don't find all the possible solutions using IRR technique you may get wrong decision, since you have to compare the IRR with the firm's cost of capital in order to decide whether the investment plan is profitable.

I suggestd that you refer to one of the many finance textbooks (bachelor level). In short, NPV is usually considered superior as it provides a clear answer to a capital budgeting case, while IRR may be misleading:

- IRR does not work in case of non-conventional cash flows (cash flow signs change more than once).

- IRR does not work with mutually exclusive projects (ranking problem).

But IRR also has benefits and is popular in practice:

- Knowing a return is intuitively appealing.

- Simple way to communicate the value of a project to someone who doesn’t know all the estimation details.

- Don’t need a required return to calculate IRR. If the IRR is high enough, you may not need to estimate an exact required return.

Уважаемый Michel Charifzadeh , даже, если знаки денежных потоков меняются 1 раз, но не с - на +, а, наоборот, с + на - IRR может вводить в заблуждение.

Dear Academics, as a practitioner in the field of investment consulting and also a financial controller, I will also present my position. Well, both indicators are useful and provide valuable information on each other. Recall that we define the IRR for NPV = 0. The most important and most widely used approaches in capital budgeting in corporations are Net Present Value (NPV) and Internal Rate of Return (IRR) (Tang and Tang, 2003; Graham and Harvey, 2001; Drury and Tayles , 1997; Bacon, 1977). When considering mutually exclusive investment projects and when we need to indicate either NPV or IRR as the recommended indicator, we always recommend the result of the NPV measure. The use of IRR is much more error prone if the investor has to choose between mutually exclusive investment projects. In some special cases, the equality between IRR and NPV may not be true - IRR can only be used when a reasonable rate of return can be computed. Due to the nature of the internal rate of return as the root of a polynomial, this may not be possible for some special cash flow patterns (Brown 2006, p. 195). As a financial advisor, I carefully listen to investors' expectations and those are almost always interested in choosing a project that generates the most positive cash flows at a given time and risk. So they always choose an investment with a higher NPV than with a higher IRR. The use of NPV is recommended if no explicit choice for the return of the difference investment can be made. Best regards Dariusz

Both methods (NPV vs IRR) have some merits and demerits and depend on many issues. However, I just want to add one issue. In case of conflicting results given by NPV and IRR for two mutually exclusive projects; the project whose NPV is higher needs to be accepted.

Regards

Azizur

If you are an academic the answer is NPV. If you need to evaluate projects in the real world you will use IRR. While you can adjust the firms cost of capital to account for the risk of the project, in reality assessing the risk of a project is mostly a guess. The size and timing of future cash flows in the typical project subject to large errors and there is a well documented tendency to be overly optimistic no matter how hard you try and avoid this. If you use NPV for the decision you get a single sum as your return in excess of your required rate of return and it is extremely difficult to mentally assess how this relates to risk. If you use IRR you can immediately see how much the expected return exceeds the cost of capital and then decide if this is enough for the risk, a must more intuitive process. Almost all prudent firms require new projects to return much more than the firms cost of capital as projected returns are seldom realised. Examining the literature on venture capital will enlighten you on this point. For those who are more sophisticated, looking at probability distributions of estimated returns using software such as @risk, IRR is the most useful measure. Return distributions created by estimating the uncertainty is each uncertain accounting variable are very good for determining risk and its effect on returns, and how that risk is distributed over time. Doing the same thing with NPVs give results which are unintuitive.

Npv

NPV is superior to IRR.

NPV is better option then IRR.

Thanks to everyone that contributed to the question, I appreciate all your answers.

Dear Director John F. Pinfold, I respect your opinion as a specialist in the field of finance, but I absolutely do not agree with you that the people who indicated the higher informative usefulness of the NPV are financial theorists. I would like to emphasize that I am a practitioner who has been in business since 2001 (Poland), so quite a long time. Entrepreneurs for whom I have provided services have always considered the NPV measure or the discounted return on investment as indicators more reliable than the abstract one and giving myke indications of IRR (among others, due to technical defects in expert opinions, I replaced the IRR indicator with the MIRR indicator). Finally, I recommend that all practitioners when assessing profitability, use the modified internal rate measure, my dear friends. If MIRR is greater than the discount rate k, accept the project. Best regards

https://www.myaccountingcourse.com/accounting-dictionary/mirr

https://www.investopedia.com/terms/m/mirr.asp

@John F. Pinfold: With any luck basing your capital budgeting decisions solely on IRR will not result in incorrect decisions very often. Suppose you discover an investment opportunity that has an unGodly high IRR. You have never seen an IRR so big! You triple check all the projected cash flows and they are accurate. This is truly a once in a lifetime investment, so based on its IRR you adopt the project. What did you just do? You just assumed that new projects with identically high IRRs will become available each year of the current project's life. Unfortunately, the odds that once in a lifetime projects are now going to become an annual event are not good. You could, of course, calculate a MIRR to mitigate the problem of an unreasonably high reinvestment rate assumption.

Net Present Value (NPV) is superior and more appropriate compared to Internal Rate of Return (IRR), IRR is not realistic and is based on an assumption and the assumption can be wronged. Therefore, it is not reliable.