Comparative Analysis of NPV and IRR Indicators Based on Practical Applications

Abstract

The current essay briefly reviewed the definitions of NPV and IRR, investigated the functions, practical uses and which is better in financial market. After describing the limitations of NPV, this paper will also give some approaches, which might be mentioned in other materials, in order to alleviate effects of some limitations. However, for perpetuity, the calculation should use the formula of perpetuity, which will be a little bit more difficult. After doing these improvements, NPV can be used to compare very different projects. Nonetheless, there are few resources about improving IRR, thus, the approaches to improve IRR were not proposed by the author. Although there is no enhancement can be made, IRR is easily to calculate the projects with short time period and single direction of cash flows, also distinctly illustrates their profitability. According to their features, NPV is more suitably used in long-term investments, and results of IRR would be more accurate and effective in short-term investments.