What is Net present value and internal rate of return? |…

Q: What is Net present value and internal rate of return?

Net present value is the discounted sum of an investment's future cash flows less the amount invested; the internal rate of return is the discount rate at which net present value is zero. Investments with a positive NPV or an IRR above the cost of capital create value. When comparing projects of different size and duration, NPV gives the more reliable answer.

Investments with a positive NPV or an IRR above the cost of capital create value. When comparing projects of different size and duration, NPV gives the more reliable answer.

Related terms

Feasibility studyA study assessing whether an investment is viable from market, technical, financial and legal perspectives.Weighted average cost of capital (WACC)The average of the costs of a company's equity and debt financing, weighted by their share of the capital structure.Discounted cash flow (DCF)A valuation method based on discounting the free cash flows an asset or company will generate in the future to the present using an appropriate discount rate.BetaA coefficient measuring the sensitivity of a share's return to changes in the market return, that is, its systematic risk.Break-even pointThe sales volume or amount at which total revenue equals total cost and the business makes neither profit nor loss.Capital asset pricing model (CAPM)A model that calculates the cost of equity from the risk-free rate, beta and the market risk premium.

Last updated: October 31, 2026 · This definition is for general information only.