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When it comes to capital budgeting, there are various approaches to evaluating a single investment or ranking mutually exclusive ventures. According to a survey conducted by Graham and Harvey (2001), Net Present Value (NPV) and Internal Rate of Return (IRR) are among the most common techniques used in practice.

There are a few differences between IRR and NPV that are worth mentioning. To begin with, it is not appropriate to rank projects using IRR — reinvesting at the same rate as IRR is unrealistic. Though, reinvesting at the same rate as the opportunity cost of capital implied by the NPV calculations is economically realistic. Hence, ranking projects based on their Net Present Value is deemed reasonable.

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