What are your opinions on the use of NPV vs IRR in making capital allocation decisions?

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The use of NPV and IRR in making capital allocation decisions are both widely used methods for evaluating potential investments, but the methods have their pros and cons.

NPV is an absolute measure that looks at the projected cash flows of a project to determine its overall value. It takes into account all future cash flows expected from an investment, which makes it a good choice when considering projects with different lives or even alternative investments. However, NPV does not consider the timing of cash flows, so it may underestimate projects with backloaded returns.

IRR on the other hand is a relative measure that considers the rate of return relative to cost over specific time periods. This can be useful when comparing two projects with similar costs and returns over different timeframes as it accounts for how quickly money will be generated from each project relative to one another. IRR has one major drawback however; multiple solutions can exist depending on how much happens during certain points within each project’s timeline. So if assumptions change significantly during those points then completely different results may occur leading to confusion or incorrect decision making.

When deciding between using NPV and IRR for capital allocation decisions there are some key considerations you should take into account such as whether your company uses absolute measures like NPV or more relative ones like IRR; what type of project you’re looking at (startup vs mature); and what kind of timeline do you expect? Taking these factors into account should help lead to better informed decisions in either case.