NET PRESENT VALUE VERSUS INTERNAL RATE OF RETURN

Abstract

The economic professional literature which deals with investment decisions can be characterised in general that the net present value shows objective picture for the decision maker while the internal rate of return – not even mentioning other „competitors” – have numerous mistakes therefore its expressiveness is limited. The net present value – determined by the minimally expected yield (calculated interest rate) – shows that how amount of wealth growth have been accumulated by the investment during its duration, but it does not inform about the real profitability of capital investment. However the investment’s internal rate of return informs the decision maker that how works the real yield of long capital investment. As every investment economic method, the adaptation of internal rate of return could also have barriers. The barriers usually derive that the method is adapted in such ’model conditions’ where it is impossible to provide reliable information. This paper analyses that which method gives more relevant information for the manager either of two most often used investment methods.