IRR uses a "discount rate" to calculate returns.

A discount rate is used to discount the value of the future money to current rates.

For long terms projects, discount rates could vary based on project timelines.

However IRR uses the same discount rate for the entire time period and hence will result in inaccuracies.

Nov 25 2013 11:37 PM
A discount rate is used to discount the value of the future money to current rates.

For long terms projects, discount rates could vary based on project timelines.

However IRR uses the same discount rate for the entire time period and hence will result in inaccuracies.

Mr Binny is true IRR uses one discount rate for entire project life to evaluate every investment whereas NPV accommodate different rates to discount the future cash flows.

Thank you

Nov 25 2013 11:58 PM
Thank you

NPV provides an accurate measure of the net value added to the shareholders (owners) of the company, whereas IRR merely measures the Rate of Return the company (management) will generate.

Hence a company/project can have a very high IRR but might be negative NPV and hence not add any value to the shareholders. Hence positive NPV is always considered superior guiding toll than IRR.

Nov 11 2015 07:37 PM
Hence a company/project can have a very high IRR but might be negative NPV and hence not add any value to the shareholders. Hence positive NPV is always considered superior guiding toll than IRR.