Riyaj Shah ! Yes, I know last time conversation with you in which you told me that you are doing MBA. Ask a question is also a part of conversation with you and other students. Now, come to your question. NPV is the excess of net present value of our profit on project over present value of our investment. In other word, it shows net cash inflows at present value. But IRR is a rate of profit where present value of total profit from project will equal to the present value of cost of project. It means both are important for analyzing the project. But, if results are opposite by using both NPV and IRR, at that time, it is better to follow NPV instead of IRR because if we use NPV, it will help us to increase shareholder's wealth at present value. So, positive NPV is best tool and very easy to calculate. Few months ago, I did compare both NPV and IRR an found NPV better.
The net present value (NPV) is a DCF technique that explicitly recognizes the time value of money. The internal rate of return (IRR) method is another DCF technique, which takes account of the magnitude and timing of cash flows.
No doubt the NPV and IRR are the methods for evaluating the profitability of a project. But, my question is
"Why is NPV method considered perhaps the best method for evaluating the profitability of a project? Are there any difficulties associates with this method".
I am very glad to say that was a great surprised on that day when I received some texts from you through Google Talk. I really enjoyed the whole conversations. Thanks Sir for your kindly help in Financial Management topics.
Riyaj Shah from India