NetPresentValue (NPV): refers to converting money with expected income in the future into current money (similar to calculating interest, but in reverse, for example, if you earn 1 10 yuan next year, assuming the discount rate is 10%, then the current money is converted into11.
In other words, the 1 10 Yuan You earned next year is equivalent to the current buying rate of 100 yuan. In other words, your current 100 yuan, plus interest 10%, will become1next year. The greater the cumulative net present value, the better. Theoretically, projects with net present value > 0 are feasible, that is to say, profitable.
The net present value of project B is higher, which is more worth investing, because if the time value of money is not considered, although the total income of A and B in five years is equal to 65,438+085,200, the income of project B comes earlier, so the calculated net present value of project B is higher and more worth investing. From here we can see that the main calculation of net present value is how much money can be earned after excluding the influence of currency depreciation.
Summary: As can be seen from the above, the net present value (NPV) refers to how much money we can earn during the project period when the time value of money (inflation depreciation) is considered, and the internal rate of return (IRR) refers to the maximum rate of currency depreciation we can bear during the project period when the time value of money (inflation depreciation) is considered. More generally speaking, if we borrow money to invest in this project, we can bear the highest annual interest rate.
For example, the IRR of a project is 20%, which means that we can bear the currency depreciation rate of 20% at most every year. That is to say, if we invest in a project with a loan, the highest loan interest rate we can bear is 20%. When the loan interest rate is 20%, the investment of the project just breaks even.
When the real currency depreciation rate is only 5% (when the loan interest rate is 5%), then the remaining 15% is profit. Although it seems to be talking about the margin of error (at most, how many mistakes I can make and still break even), the ability to resist risks can actually be considered as profit rate and profitability.
Just like taking an exam, if you pass 60 points and your real level is 90 points, you will get 30 points for your bad mistakes. Even if you miss 30 points, you can still pass. These 30 points are converted into your internal rate of return (IRR), and your real level is only 65 points, so there is only 5 points for you to make mistakes. If you make a little mistake, you will fail. At this time, your internal rate of return is only 5 points. Although the internal rate of return is calculated, it actually shows your real level (90 or 65).
In actual project investment, NPV is a specific value and IRR is a ratio. If you want to compare, I think IRR is definitely better because it is a relative value. Pure NPV is only an absolute value, regardless of the investment amount. Only by considering the investment amount at the same time can the profitability of the project be more fully reflected. After all, the profitability of the two projects is not the same as 50,000 and 654.38+00,000 NPV.