Net Present Value or Internal Rate of Return (IRR)

• This widespread evaluation method is based on easily understood concepts and benefits from the ease of expressing business assumptions. Its widespread use may also be historical, because earlier industrial business cases were bound to a less volatile world than nowadays.

• The fundamental assumption of NPV (IRR) is a linear course of action; the business project is well predictable. The remaining uncertainty about the ROI is handled through a company-wide risk premium as part of the discount rate (WACC). Thus, NPV (IRR) applies to Business-As-Usual (BAU) projects.

• In case of higher uncertainties, decision makers who prefer to stick with NPV will add safety margins: higher discount rate (hurdle rate), higher costs, longer durations, lower ROI. Unfortunately, this easily leads to falsely rejected business opportunities.

• NPV lacks the capability of representing actual uncertainty, managerial adaptability, and uncertain business opportunities. Thus, business case owners cannot express financially their business realities. This again easily leads to falsely rejected business opportunities.