TIR vs VAN: How these metrics can guide your investment strategy

2026-01-06 18:54:59

When an investor faces multiple financing opportunities, they need reliable tools to measure which project will generate more value. The Internal Rate of Return (IRR) and the Net Present Value (NPV) are two financial indicators that, although complementary, can offer very different perspectives on the viability of an investment. Often, the NPV and IRR send contradictory signals: a project may look attractive due to its high IRR but have a low NPV, or vice versa. Therefore, mastering both metrics is essential for making sound financial decisions and avoiding costly mistakes.

Understanding Net Present Value (NPV)

How does NPV work?

Net Present Value is a calculation that translates all future cash flows of a project into their equivalent in today’s money. The logic is simple: the money you will receive in 5 years is not worth the same as what you have now.

To calculate it, you need:

To project all cash flows generated by the investment
To apply a discount rate that reflects the opportunity cost
To subtract the initial investment

NPV expresses the net benefit in absolute monetary terms. If it is positive, the investment will generate profits. If it is negative, it will result in losses.

The NPV formula

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