Net Present Value (NPV) and Internal Rate of Return (IRR)

Deciding Whether to Invest

NPV and IRR are key tools used in making investment decisions.

© iStockphoto/jwohlfeil

Imagine that your organization is considering buying a machine costing $450,000.

The machine is expected to yield $100,000 a year for five years, but your board decides not to go ahead with it.

The investment is pretty much risk-free, the money is available, and the business is almost guaranteed a profit of $10,000 a year.

So, why have they decided not to invest?

At first glance, investment decisions like these can seem to be "no brainers" – make the investment, and then collect the profit. But the value of money received in the future is less than the value of that money now (because of inflation and interest rates). So it's possible that the return from an investment might actually be worth less than the investment itself, once you have compared the value of money today, and in the future.

There are also other investment opportunities to consider. Would investing the money elsewhere provide a better return?

In this article, we'll look at three key approaches used in making investment decisions:

... for the complete article:

Mind Tools Club members, click here.

Join the Mind Tools Club to finish this article AND get 1,000 more resources

Join now for just $1, first month

"When I started using Mind Tools, I was not in a supervisory position. Now I am. Along with that came a 12% increase in salary." – Pat Degan, Houston, USA
Add this article to My Learning Plan

Where to go from here:

Join the Mind Tools Club

Click to join Mind Tools
Printer-friendly version
Return to the top of the page

Create a Login to Save Your Learning Plan

This ensures that you don’t lose your plan.


Connect with…

Or create a Mind Tools login. Existing user? Log in here.
Log in with your existing Mind Tools details
Lost Username or Password
You are now logged in…

Lost username or password?

Please enter your username or email address and we'll send you a reminder.

Thank You!

Your log in details have been sent to the email account you registered with. Please check your email to reset your login details.

Create a Mind Tools Login
Your plan has been created.

While you're here, subscribe to our FREE newsletter?

Learn a new career skill every week, and get our Personal Development Plan workbook (worth $19.99) when you subscribe.


Thank You!

Please check your Inbox, and click on the link in the email from us. We can then send you the newsletter.