Application and Comparison of NPV and IRR Methods in the Company Investment Decision

Jinqiao Huang; Jianwen Tong; Peini Wang; Xilin Zheng

doi:10.2991/aebmr.k.220307.012

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Application and Comparison of NPV and IRR Methods in the Company Investment Decision

Authors

Jinqiao Huang¹^{, †}, Jianwen Tong²^{, †}, Peini Wang³^{, *}^{, †}, Xilin Zheng⁴^{, †}

¹School of Finance, Nankai University, Tianjin, 300350, China

²School of Business, East China University of Science and Technology, Shanghai, 201424, China

³School of Social Science, the University of Manchester, Manchester, M13 9PL, UK

⁴School of Business and Tourism Management, Yunnan University, Kunming, 650000, China

^†

Those authors contributed equally.

^*Corresponding author. Email: peini.wang@student.manchester.ac.uk

Corresponding Author

Peini Wang

Available Online 26 March 2022.

DOI: 10.2991/aebmr.k.220307.012 How to use a DOI?
Keywords: Net Present Value; Internal Rate of Return; Advantages; Disadvantages; Company Investment Decision
Abstract: In order to find out the application conditions of Net Present Value (NPV) and Internal Rate of Return (IRR) in practice, based on previous studies, the paper summarized the advantages and disadvantages of the two methods and explores the specific application conditions in corporate finance. The results showed that the NPV method can reflect the liquidity and overall profitability of investment, provide clear expectations, and be more comprehensive in risk measurement. However, the NPV method could not avoid the problem of cash flow uncertainty. Moreover, the opportunity cost is limited by the project and corporate transparency. It was also found that the IRR method can easily calculate the rate of return on investment and compare it with the industry benchmark return on investment, which has been widely used by practitioners. However, the IRR method may produce multiple values when the cash flow is not a fixed annuity, and the IRR is a ratio that cannot reflect the actual profit. Therefore, several modified NPV and IRR methods were introduced and discussed with their application conditions. In practice, to be noted, there may be inconsistencies between NPV and IRR for investment evaluation. Although both NPV and IRR are effective methods for company investment decisions, it is suggested that, the investment situations should firstly be analyzed before making decision of which methods to be chosen.
Open Access: This is an open access article under the CC BY-NC license.

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Volume Title: Proceedings of the 2022 7th International Conference on Financial Innovation and Economic Development (ICFIED 2022)
Series: Advances in Economics, Business and Management Research
Publication Date: 26 March 2022
ISBN: 10.2991/aebmr.k.220307.012
ISSN: 2352-5428
DOI: 10.2991/aebmr.k.220307.012 How to use a DOI?
Open Access: This is an open access article under the CC BY-NC license.

Cite this article

ris enw bib

TY  - CONF
AU  - Jinqiao Huang
AU  - Jianwen Tong
AU  - Peini Wang
AU  - Xilin Zheng
PY  - 2022
DA  - 2022/03/26
TI  - Application and Comparison of NPV and IRR Methods in the Company Investment Decision
BT  - Proceedings of the 2022 7th International Conference on Financial Innovation and Economic Development (ICFIED 2022)
PB  - Atlantis Press
SP  - 71
EP  - 78
SN  - 2352-5428
UR  - https://doi.org/10.2991/aebmr.k.220307.012
DO  - 10.2991/aebmr.k.220307.012
ID  - Huang2022
ER  -

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