Net Present Value
is the difference between the present value of cash inflows and the present
value of cash outflows. NPV compares the value of a dollar today to the value
of that same dollar in the future, taking inflation and returns into account.
(IRR) is the discount rate often used in capital
budgeting that makes the net present value of all cash flows from a particular
project equal to zero. Generally speaking, the higher a project's internal rate
of return, the more desirable it is to undertake the project. As such, IRR can
be used to rank several prospective projects a firm is considering. Assuming
all other factors are equal among the various projects, the project with the
highest IRR would probably be considered the best and undertaken first.