What each number actually answers
NPV answers: "at my required rate of return, how much value (in today's money) does this project create?" — a dollar figure. IRR answers: "at what discount rate does this project exactly break even (NPV = 0)?" — a percentage rate. They're derived from the same discounted cash flow math, but they answer genuinely different questions, which is exactly why they can disagree about which of two projects is "better."
Why NPV and IRR can rank projects differently
This happens specifically when comparing projects of very different scale or cash flow timing. A small project might have a very high IRR (a great percentage return) but a modest NPV (not much total value created, simply because it's small) — while a larger project has a lower IRR but a much bigger NPV (more total value, even at a "worse" percentage rate). IRR, being a percentage, doesn't account for the actual scale of value created; NPV does, directly, in currency terms.
Project A: small investment, IRR = 40%, NPV = $5,000
Project B: large investment, IRR = 15%, NPV = $50,000
IRR says: Project A is the better "rate of return"
NPV says: Project B creates ten times more actual value
Why NPV is generally considered more reliable
NPV directly measures the actual value created (or destroyed) at your real required rate of return, expressed in the same currency you actually care about — it answers the practical business question ("does this make us more money than our alternative use of capital would") directly. IRR's percentage framing can make a smaller project look more attractive purely due to its scale, even when the larger project would create substantially more total value for the same capital committed — which is why standard financial practice defers to NPV when the two measures disagree, particularly for mutually exclusive projects competing for the same capital.
When IRR still has genuine value
IRR remains useful as an intuitive, scale-independent "rate of return" figure — easy to compare against a hurdle rate or cost of capital without needing to specify a discount rate upfront the way NPV does. It's a reasonable quick screening tool, just not the final word when ranking projects of meaningfully different sizes.
The "no real IRR" edge case
Some cash flow sequences — particularly those with multiple sign changes (an initial outflow, followed by an inflow, followed by another outflow, for instance) — can have multiple valid IRRs, or none at all within a reasonable search range. NPV never has this ambiguity: for any given discount rate, there's always exactly one NPV value, computed directly with no search or ambiguity involved.
Common mistakes
- Using IRR alone to choose between projects of very different sizes. This can favor a smaller project with a flashier percentage return over a larger one that actually creates more total value.
- Assuming every cash flow sequence has exactly one IRR. Sequences with multiple sign changes can have multiple or zero real IRR solutions — NPV doesn't share this ambiguity.
- Ignoring NPV's dependency on the chosen discount rate. NPV's sign (and conclusion) can flip entirely depending on what rate you use — always sanity-check the discount rate against your actual cost of capital.
FAQ
Why would NPV and IRR ever disagree about which project is better?
This typically happens with projects of different scale or cash flow timing — IRR is a percentage and doesn't account for the absolute size of value created, while NPV measures that value directly.
Which should I trust if NPV and IRR conflict?
NPV is generally considered more reliable for comparing projects, especially of different sizes, since it directly measures value created rather than a scale-independent rate.
Can a cash flow sequence have more than one IRR?
Yes — sequences with multiple sign changes (multiple shifts between positive and negative cash flows) can have multiple valid IRR solutions, or none at all, unlike NPV which always has a single well-defined value at any given discount rate.
Calculate NPV and IRR for your own cash flow series with the NPV & IRR Calculator — entirely in your browser.