The net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used together to make capital budgeting decisions.
Consider the case of Blue Hamster Manufacturing Inc.:
Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The companyâ€™s CFO remembers that the internal rate of return (IRR) of Project Delta is 11.3%, but he canâ€™t recall how much Blue Hamster originally invested in the project nor the projectâ€™s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Delta. They are: