IRR Method Vs NPV Method for project apraisal

[DevonMatthews]

This to me seems like the exact same thing, the cashflows are modeled giving an equation of value, then the IRR method sets the NPV= 0 and finds the interest rate which solves this equation, so we have the decision variable i where {i:NPV(i)=0} and if i>WACC the project is accepted.

The NPV method uses the same cashflows and times in the equation of value and uses the NPV discounted at the WACC as the decision criterion, and the project is approved if the result is positive, so project is accepted if NPV(WACC)>0

This appears to be the exact same thing stated in two different ways, if the NPV(WACC)>0, this means there exists room to increase the interest rate such that NPV(IRR)=0 so by general reasoning IRR>WACC, in a few problems i devised myself and experemented with different values it always seems to lead to the same result.

 

[didster]

You're right, they're very similar.
The subtle difference is that
with the NPV method you find the NPV for a given WACC; and
with the IRR method you find the IRR that gives NPV=0.

That is, the equations are valued at 2 different rates.

In most cases they should give the same result on whether a project will make money or not.
For comparing projects, they can give different results (where higher NPV/IRR is better).
Take 2 projects,
A: you invest 100 now and receive 105 in a year;
B: you invest 100 now and receive 160 in 10 years;
If my calculations are correct,
NPV of A at 4.5% = 0.48 and IRR = 5%
NPV of B at 4.5% = 3.03 and IRR = 4.8%

Other reasons to use one and not the other are:

• when the IRR doesn't have a solution (or has more than one), you might prefer to use NPV
• NPV allows you to use a yield curve (non constant return) easily
• IRR is easy to interpret and does not depend on size of outlay. (A project that has cashflows twice as large gives a NPV that's twice as large.)
• depending on whether you prefer a rate of return or absolute profit (in £)