The following is modified from "Financial Statements", T. Ittelson, 2009, ISBN: 978-1-60163-023-0.

NPV and IRR measure two different but complementary, aspects of capital use.
The two different methods of evaluating capital investments each have inherent
advantages and disadvantages.

Net Present Value (NPV)	Internal Rate of Return (IRR)
Advantages	NPV is a direct measure of value-added to the company from executing the project Comparing the value of alternative projects is easy with NPV analysis: just pick the project with the highest NPV over zero	IRR Is a popular capital budgeting tool because it show the efficiency of capital use in an easy-to-understand percent return format. Computing IRR is valid without having to estimate a discount rate
Disadvantages	NPV requires an assumed input discount rate (capital cost plus risk premium, which may be difficult to estimate.	IRR computes only a percent return, not a value, and thus disregards project scale and is not a measure of ultimate worth to the company. IRR can make a small project appear more attractive than a large project. In fact, a very small project could have a very high IRR but also have a low and very unattractive NPV. IRR assume cash flow returns are invested at an often unrealistically high rate (the IRR). MIRR (modified internal rate of return) analysis solves this problem.

From your readings and/or experience:

Question 1: Add to the advantages and disadvantages to the consideration of NPV for capital projects.

Question 2: Add to the advantages and disadvantages to the consideration of IRR for capital projects.

Answer rating: 100% (QA)

Question 1 Advantages of Net present value NPV accounts for the time value of money which makes it a more accurate measure of the profitability of a capital project over time NPV allows for easy compa... View the full answer