What are the differences between NPV and IRR?
An example of an AI chatbot conversation about the differences between NPV and IRR in finance.
What are the differences between NPV and IRR?
NPV (Net Present Value) calculates the value of future cash flows in today's terms, while IRR (Internal Rate of Return) is the discount rate that makes the NPV of cash flows equal to zero.
Can you explain how to calculate NPV?
To calculate NPV, subtract the initial investment from the sum of the present values of future cash flows, using a specific discount rate.
What about IRR? How is it calculated?
IRR is calculated by finding the discount rate that makes the NPV of all cash flows equal to zero. This often requires iterative methods or financial calculators.
Which one is better to use for investment decisions?
It depends on the context. NPV provides a dollar amount that indicates value, while IRR gives a percentage return. Both have their uses.
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