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**Internal Rate of Return (IRR)** is the effective compound rate of interest which can be earned on the invested capital. If the IRR is greater than alternate investment with similar risk, then it is a worthwhile project. The typical hurdle rate is 12%

**Net Present Value (NPV)** is the current or the present value of the future cash flows (both inflow and outflow). The current value of a future cash flow depends on the time gap between today and the time of cash flow and discount rate. For e.g. if we anticipate a cash inflow of Rs. 100 after 2 years. NPV will determine the cashflow as on today (amount you will receive if you do not want to wait for 2 years at a particular discount rate). A profitable project is one where the NPV is positive.

**Return on Investment (ROI)** is the ratio of money gained or lost divided by the initial investment. A $1000 investment that results in interest of $50 has a 5% ROI. A project with a higher ROI gets prioritized

An application-oriented question on the topic along with responses can be seen below. The best answer was provided by Sudheer Chauhan on 27th December 2019.

Applause for all the respondents - Sudheer Chauhan, Shashikant Adlakha, Sudarshana Ramaiah, Nilesh Gham, Ajay Sharma

## Question

## Vishwadeep Khatri 265

Q 221. Internal Rate of Return (IRR), Net Present Value (NPV) and Return on Investment (ROI) are the most common financial metrics used for comparing investments and their value. Each metric provides a different perspective and hence one is preferred over the other. Compare their characteristics and highlight situations (for each) where one is preferred over the others.Note for website visitors- Two questions are asked every week on this platform. One on Tuesday and the other on Friday.All questions so far can be seen here - https://www.benchmarksixsigma.com/forum/lean-six-sigma-business-excellence-questions/Please visit the forum home page at https://www.benchmarksixsigma.com/forum/ to respond to the latest question open till the next Tuesday/ Friday evening 5 PM as per Indian Standard TimeThe best answer is always shown at the top among responses and the author finds honorable mention in our Business Excellence dictionary at https://www.benchmarksixsigma.com/forum/business-excellence-dictionary-glossary/ along with the related term## Link to post

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