Net Present Value (NPV) and Internal Rate of Return (IRR) are both methods used to evaluate the profitability of a real estate investment, but they answer different questions:
| Aspect |
NPV (Net Present Value) |
IRR (Internal Rate of Return) |
| Definition |
The difference between the present value of cash inflows and outflows over time |
The discount rate at which the NPV of all cash flows (in and out) equals zero |
| What It Tells You |
The dollar amount you gain or lose based on your required return |
The annualized rate of return the investment is expected to generate |
| Decision Rule |
Invest if NPV > 0 (i.e., investment exceeds your return requirement) |
Invest if IRR > required rate of return |
| Considers Size of Return? |
Yes – gives a dollar figure, so larger projects show larger NPVs even with lower IRRs |
No – a high IRR on a small project might not be better than a lower IRR on a big one |
| Preferred For |
Absolute profit measurement; comparing across projects with different scales |
Comparing investment efficiency or growth rate of return |
| Drawbacks |
Depends on a discount rate you must estimate |
Can be misleading if there are multiple IRRs (non-normal cash flows) |
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