The definitions of NPV and IRR can be very academic. To better appreciate how this can be applied in real-life, consider the set of cash flows below:

whereby the NPV of those cash flows can be calculated as

`C7 = NPV(C6,D5:I5)`

The result of "*NPV-ing*" those cash flows based on a 10% discount rate gives $487. What does this $487 really mean? We know that this is the "value" of the project but how do we make sense of this?

Next consider if we "plug" the *$487* back into the same set of cash flows as the *initial investment*:

whereby:

`C16 = IRR(C15:I15)`

This gives us an **IRR of 10.0% **which basically means: "if we invest $487 into this project, our annualised return on this investment would be 10%."

While the above calculations are scientific, the results do not necessarily translate to how we should go about evaluating a project in real-life i.e. even if the model shows $487, it does not mean that as a buyer, we should pay $487.

Many factors influence the outcome of NPV and IRR. Cashflows for example are driven based on the post investment strategy and will drive and entirely different NPV given the same 10% discount rate. The input price (upfront cash outlay) is also determined by negotiation dynamics between buyer and seller.

Always remember that while the calculations are scientific, and the 'soft factors' such as post-investment execution are usually the ones that drive the discussions around pricing and returns.