Determining a project’s financial viability is crucial for businesses, and “how to calculate net present value (NPV) and internal rate of return (IRR)” are essential tools. NPV gauges the present value of a project’s future cash flows while IRR determines the discount rate that equates these cash flows to zero. For instance, evaluating a construction project’s potential return on investment (ROI) requires calculating NPV and IRR.
These calculations have been used for decades, dating back to economist Irving Fisher’s work on IRR in 1930. Understanding NPV and IRR helps businesses assess project risk, compare investment options, and make informed decisions that maximize financial returns.