What is: internal rate of return (IRR)and net present value (NPV) techniques.
Internal rate of return (IRR) and net present value (NPV) are two commonly used financial metrics to evaluate the profitability of an investment project or business venture.
1. Internal Rate of Return (IRR):
The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular investment project equal to zero. In other words, IRR is the rate at which the present value of cash inflows equals the present value of cash outflows. It is a measure of the profitability of an investment over time, and is used to assess the attractiveness of an investment opportunity. The higher the IRR, the more attractive the investment opportunity is considered to be.
2. Net Present Value (NPV):
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a specific time period. In other words, NPV represents the value created or lost by undertaking an investment project. A positive NPV indicates that the project is expected to generate value, while a negative NPV indicates that the project is expected to result in a loss. NPV is a key metric used in capital budgeting and investment analysis to determine whether an investment project is economically viable.
Both IRR and NPV are important tools in financial analysis and decision-making, as they help investors and managers to assess the potential profitability and financial viability of investment opportunities. Ultimately, these techniques assist in making informed decisions about where to allocate financial resources for the best return on investment.