Example Scenarios of NPV and IRR
Let us take a look at how IRR is used in project management.
In the attached images, there are two examples of present value cash flow scenarios. In Figure 1, there is an initial investment of $110 with a discount factor of 10%. Over a period of 5 years, its net present value results in 2.4. In figure 2, there is an initial investment of $150. Over a period of 5 years, its net present value is 64.15
In these cases, if an increased discount rate is applied or higher IRR is applied, figure 1 will result in figure 3, resulting in a NPV of -9.75 with a discount factor of 14%. In the case of figure 2, if a discount factor of 19% is applied, the resulting NPV will be 0.80.
As in fig 4, when an IRR of 19% is applied to fig. 2 it results in an almost zero NPV.
Since the higher the IRR, the better the project’s feasibility, figure 4 with an IRR of 19% is a better choice from a project management point of view.