[scientizscht (OP)]

Hello!

When assessing an investment, you may use NPV and IRR.

I think if the NPV is higher than the initial investment and if IRR is higher than the cost of capital, then your investment is attractive.

However, I read that some times NPV and IRR show different things, i.e. a great NPV can have a horrible IRR.

I do not understand that, can anyone explain?

[Colin2B]

However, I read that some times NPV and IRR show different things, i.e. a great NPV can have a horrible IRR.

I do not understand that, can anyone explain?

In general they give consistent results but they make different assumptions. With NPV you assume cash flows are reinvested at the cost of capital but IRR assumes reinvest at the IRR.
Mostly that’s not a problem, but if you are comparing two projects with very different cash flow profiles you might hit a problem. For example, a typical investment involves some capital outlay and running costs with negative cashflows until income builds up; you may have further capital expenditure when you start to run out of capacity and take a hit on cash flows etc. If you compare this with a project where all income is early in the project and expenditure at the end you might not get the same result from NPV and IRR. For some cashflow profiles you can get more than one solution for IRR.
In general I would go for NPV, but you will find a lot of investors don’t really understand NPV and like the perceived simplicity of a return on their investment.

[evan_au]

Slightly off-topic, but this cartoon addresses the difficulty of assessing the true costs and returns of investments.

IRR_Dinosaurs.jpg (105.97 kB . 800x516 - viewed 6962 times)
Spoiler Alert: It is really talking about assessing the costs and returns of dealing with Climate Change.