Application and Comparison of NPV and IRR Methods in the Company Investment Decision

In order to find out the application conditions of Net Present Value (NPV) and Internal Rate of Return (IRR) in practice, based on previous studies, the paper summarized the advantages and disadvantages of the two methods and explores the specific application conditions in corporate finance. The results showed that the NPV method can reflect the liquidity and overall profitability of investment, provide clear expectations, and be more comprehensive in risk measurement. However, the NPV method could not avoid the problem of cash flow uncertainty. Moreover, the opportunity cost is limited by the project and corporate transparency. It was also found that the IRR method can easily calculate the rate of return on investment and compare it with the industry benchmark return on investment, which has been widely used by practitioners. However, the IRR method may produce multiple values when the cash flow is not a fixed annuity, and the IRR is a ratio that cannot reflect the actual profit. Therefore, several modified NPV and IRR methods were introduced and discussed with their application conditions. In practice, to be noted, there may be inconsistencies between NPV and IRR for investment evaluation. Although both NPV and IRR are effective methods for company investment decisions, it is suggested that, the investment situations should firstly be analyzed before making decision of which methods to be chosen.