NPV vs IRR: What's the Difference?

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)