%
Net present value
?
IRR
?
How to read the two numbers
- The first flow is period zero and is not discounted. It is the money you spend today, so it counts at face value. Enter it as a negative.
- A positive NPV means the project beats your discount rate. The discount rate is what you could earn elsewhere, or what your capital costs. NPV says how much better or worse this is, in today’s money.
- IRR is the rate at which NPV would be zero. It is the project’s own rate of return, independent of what you compare it to.
- IRR does not always exist. A series that never changes sign has no internal rate of return, and one that changes sign several times can have more than one. The calculator says so rather than returning a plausible-looking wrong number.
- It is solved by bisection, not by guessing. Which is slower and cannot diverge — a wrong answer delivered confidently is worse than no answer.
The equivalent in Excel
Excel’s NPV is a trap: it discounts the first value too, so the usual correct form is =NPV(rate, flows_from_period_1) + initial_outlay, with the outlay added outside the function. =IRR(all_flows) takes the whole series including period zero.