Once the cash flow has been prepared, computing the financial performance of a project is quite straightforward. This evaluation estimates the financial benefit that the project returns on the investment under the one scenario with the highest probability of occurrence.

Two indicators are generally accepted to measure the return on the project: The Net Present Value (NPV) and the Internal Rate of Return (IRR). The NPV compares the Present Value of the cash available to investors to the Equity Investment deployed over the evaluation period. Conversely, the IRR calculates the minimum return that the project would provide under the scenario evaluated, so investors can compare the project against other investment alternatives.

There are circumstances where the IRR rule and the NPV rule provide conflicting advice. In particular, they may differ where there are two mutually exclusive projects that must be ranked according to which one is best and where these two projects have very different timing of cash flows.

We have put together brief definitions and tips that will help you understand the right use of each indicator and how confident you should be about the results. You can reach these sections here for NPV or IRR. 

Microsoft Excel has five functions to calculate NPV and IRR: NPV, XNPV, IRR, XIRR, and MIRR. Which you choose depends on the financial method you prefer, whether or not cash flows occur at regular intervals, and whether or not the cash flows are periodic.

However, the first two are based on the regular definition so they are the most used for financial modeling with Excel. XNPV and XIRR are utilized for cash flows that occur at irregular intervals.

Each Financial Indicator provides relevant information to evaluators, so they all together help craft a better view of the financial behavior of the project.

However, despite a strong technical preference for NPV and the limitations of the IRR, different surveys indicate that industry practitioners and executives prefer IRR over NPV. It seems that many evaluators still find it intuitively easier to evaluate investments in terms of percentage Rates of Return than dollars.

Read an NPV Analysis including the most relevant pros and cons of each method and tips to have in mind when utilizing them

There are circumstances, however, where the IRR rule and the NPV rule provide conflicting advice. In particular, IRR and NPV may differ where there are two mutually exclusive projects that must be ranked according to which one is best and where these two projects have very different timing of cash flows. Whenever there is a conflict between NPV and IRR the correct answer is provided by NPV.

The lesson here is that the internal rate of return, by itself, can fool the evaluators. If the investments being considered have different shapes (that is, very different timing of costs and benefits) or if the project has large late cleanup costs, then the higher-IRR-is-better rule can steer you to the wrong investment. Ideally, you want the NPV curve, if you want to evaluate an investment.