Quick answer
NPV tells you what an investment is worth above its cost at your required return; IRR tells you the return. A $50,000 investment returning $75,000 unevenly over five years has an NPV of $4,414 at 10% and an IRR of 12.90% — it clears a 10% hurdle, repays in 3.83 years, and returns $1.09 of present value per $1 invested.
How the IRR & NPV Analyzer works, step by step
Enter the initial investment and the cash flow for each year — uneven, lumpy, even negative in a bad year; the tool takes up to 15 years of flows. The analyzer discounts every flow back to today at your required return and sums them into the net present value. A positive NPV means the investment beats your hurdle after pricing time and risk; a negative one means it does not.
The IRR is the discount rate at which NPV is exactly zero, found by bisection. It is the number people quote because it sounds like an interest rate, but it quietly assumes interim cash flows reinvest at the IRR itself — generous for high-IRR projects. NPV assumes reinvestment at your required return instead, which is why the CFA curriculum calls NPV the better rule when the two disagree.
The payback period answers the cruder question — when am I whole again? — by tracking cumulative undiscounted cash and interpolating the fractional year. It measures exposure, not value. The profitability index divides the present value of inflows by the initial investment, which is how you compare a small good deal against a large one. A PI above 1.0 means the same thing as a positive NPV; below 1.0, the same as a negative one.
When the verdicts conflict — IRR above the hurdle but NPV negative — believe the NPV. It is denominated in money, at your rate. IRR is a percentage of nothing in particular, and on cash-flow patterns that change sign more than once it can have several values or none; the analyzer reports no IRR when the NPV curve never crosses zero. For mutually exclusive projects, rank by NPV: a small project with a high IRR can still create less value than a large one with a lower return.
The discount rate is the input that decides the answer. The example below is worth $4,414 at a 10% required return and −$2,878 at 15% — the same cash flows, the opposite verdict. If a deal's NPV flips within a point or two of your rate, the honest conclusion is that the deal is marginal, and the next step is better cash-flow estimates, not a more convenient rate.
The formula
NPV = Σ CF_t ÷ (1 + r)^t for t = 0..n, with CF_0 the negative initial investment. IRR is the r that makes NPV = 0. Profitability index = present value of years 1..n ÷ initial investment. Payback = the year cumulative cash flow crosses zero, fractional year interpolated.
Worked example — try it on the calculator above
Worked example: $50,000 in, five uneven years back
Invest $50,000 today and receive $8,000, $12,000, $15,000, $18,000 and $22,000 in years one to five — $75,000 in total. At a 10% required return the flows are worth $54,414 today, so NPV is +$4,414: the deal beats the hurdle by that much in today's money. The IRR is 12.90% — the break-even rate in present-value terms. Payback lands at 3.83 years (the cumulative flow turns positive during year four: $35,000 back by the end of year three, then $15,000 of year four's $18,000 completes it). The profitability index is 1.09. Verdict: accept at a 10% hurdle; at a 15% hurdle the same deal's NPV turns negative (−$2,878) and the answer flips.
Frequently Asked Questions
Which should I use, NPV or IRR?
NPV for the decision, IRR for the conversation. NPV measures value created in today's money at your actual required return, handles any cash-flow pattern, and ranks mutually exclusive projects correctly. IRR is a useful summary statistic and a common language — but compare it only against your hurdle, never against another project's IRR when the projects differ in size or timing.
What discount rate should I use?
Your opportunity cost: what the same money earns in the next-best investment of similar risk. For a business project that is often the company's cost of capital (commonly 8–12%); for a personal investment, the return of the index fund you would otherwise buy, plus a premium for illiquidity and effort. If the verdict flips within a point or two of your rate, the deal is marginal.
Why does the tool sometimes say there is no meaningful IRR?
IRR exists only when the NPV curve crosses zero. A project whose flows never repay the investment has no crossing, so the tool reports no IRR. Flows that change sign repeatedly (a big outflow at the end, say) can cross several times, giving several 'correct' IRRs. In both cases IRR is the wrong instrument — NPV at your rate still gives a clean answer.
Does payback account for the time value of money?
The payback shown is the simple version — cumulative undiscounted cash — because its job is to measure exposure: how long your capital is at risk. The NPV already contains the discounted view of the same flows. In the example, simple payback is 3.83 years but discounted payback is 4.68 years; the gap between the two is the cost of time on your deal.
Estimates, not advice. This calculator provides educational estimates based on the inputs you enter and the assumptions shown on this page. It is not financial, tax or investment advice, and it cannot see your full situation. Verify important figures against official sources, and consider a qualified professional for decisions about your own money. See our Disclaimer and Methodology.