NPV and IRR are complementing metrics in engineering economics
Using Rate of Return or IRR alone can be misleading

When discussing investment, most people tend to focus only on rate of return (or internal rate of return, IRR) – this is fine as long as the options are very similar
 The common investing options most people are exposed to, like ETFs or commodities, are somewhat standardised and closely regulated – thus the risk are not too diverse
 Those investments would have similar initial capital (or at least we can make it so) and risk factor that are not too significantly different

In engineering business and thus its economics, comparing IRR alone is not only insufficient but also can be misleading
 Investment in engineering business can vary from a small project needing only few millions dollar to a mega project requiring close to a billion dollar
 On top of that, one project may carry more risk than the other – consider building a road on flat plane vs on mountainous area, where you have to account for unforeseen circumstances

To better understand the arguments above, let’s consider an example below
 Consider that we only have $1000 of available and disposable cash to invest in a project. Yet we’re being presented with two options per Table A
 One require only $450 of capital and will give us 20% p.a. return, while another require $1000 of capital but will only give 15% p.a. return.
 Which one would we choose? Better yet, would we decide based on this alone?
 Consider that we only have $1000 of available and disposable cash to invest in a project. Yet we’re being presented with two options per Table A
Table A
Project  .  Y1  Y2  Y3  Y4  Y5  Y6  .  IRR 

Project 1  450  150  150  150  150  150  20%  
Project 2  1000  300  300  300  300  300  15% 
NPV and IRR are complementing metrics

The previous table and metric (IRR) isn’t sufficient for us to make an informed decision – we would need further information
 We would need at least the net present value (NPV) so that we can gauge how much value (return in dollar amount) the project will give
 If we apply a discount rate of 10% (in fact, it doesn’t matter what discount rate we use since we’ll be doing direct comparative analysis) we would get the results per Table B
 When we do this, we can see that despite Project 1 giving 20% IRR, the NPV is only $118.6. But Project 2 will give us $137.2 with only 15% IRR

NPV represents the additional value the project gives after recovering the initial investment and exceeding my possible alternative investment
 The discount rate applied for calculation of NPV normally to counter for possible alternative investment and thus my expected minimum return
 Due to scale, a 15% IRR for $1000 investment would give us more return in absolute dollar. To put it in the extreme, a 10% of a million dollar would worth more than 50% of a thousand dollar.

Both IRR and NPV need to be used together would tell us the rate of return of our investment
 IRR should be used to compare against our minimum expectation (normally represented by discount rate) – to ensure it meets or exceed it. Beyond that, we should go back to NPV
 NPV should be the primary metric for you to anchor your business investment decision, but it has a requirement – to know what is our acceptable discount rate (minimum expected IRR)
Table B  expanded to include NPV results
Project  .  Y1  Y2  Y3  Y4  Y5  Y6  .  IRR  NPV@10 

Project 1  450  150  150  150  150  150  20%  118.6  
Project 2  1000  300  300  300  300  300  15%  137.2 