Can IRR be positive if NPV negative? (2024)

FAQs

What happens to the IRR if the NPV is negative? ›

If there is only one change of sign in the cash flows from negative to positive, as in initial investment (negative) followed by net revenue in all future periods (positive), then if NPV is negative at an interest rate, then the IRR will be lower than that rate.

With NPV, proposals are usually accepted if they have a net positive value. In contrast, IRR is often accepted if the resulting IRR has a higher value compared to the existing cutoff rate. Projects with a positive net present value also show a higher internal rate of return greater than the base value.

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. By contrast, the internal rate of return (IRR) is a calculation used to estimate the profitability of potential investments.

If the calculated NPV of a project is negative (< 0), the project is expected to result in a net loss for the company. As a result, and according to the rule, the company should not pursue the project.

No Solution

The IRR function expects at least one positive cash flow and one negative cash flow; otherwise, it returns the #NUM! error value.

The IRR rule may be unreliable when a project's stream of expected cash flows includes negative cash flows. Negative cash flows can occur when an investment requires the construction of several facilities that are built at different times in the future.

If a project's NPV is positive, then it is IRR is greater than its cost of capital.

However, when comparing two projects, the NPV and IRR may provide conflicting results. It may be so that one project has higher NPV while the other has a higher IRR. This difference could occur because of the different cash flow patterns in the two projects.

If the decision is solely based on IRR, this will lead to unwisely choosing project A over B. Another very important point about the internal rate of return is that it assumes all positive cash flows of a project will be reinvested at the same rate as the project, instead of the company's cost of capital.

A) The payback period exceeds the discounted payback period. B) The NPV equals the difference between the sum of the undiscounted future cash flows and the initial cost. C) If the NPV is negative, the IRR will be greater than zero.

What causes a negative IRR? ›

Negative IRR occurs when the aggregate amount of cash flows caused by an investment is less than the amount of the initial investment. In this case, the investing entity will experience a negative return on its investment.

All else being equal, the higher the IRR, the higher the NPV, and vice versa.

However, when NPV, is zero it means that the investment earns a rate of return equal to the discount rate. This makes understanding IRR much easier because an investment that uses a 10% discount rate that returns an NPV of zero indicates the investment would yield a 10% return.