Finance

Why NPV Equals Zero at an Investment's IRR

Feeding a real bisection-solved IRR of 15.24% back into the NPV formula for the same investment returns a value just a few paise from zero — confirming IRR is, by definition, the rate where NPV crosses zero.

Closing the loop: IRR back into NPV

A ₹1,00,000 investment returning ₹30,000 a year for 5 years has a real IRR of 15.24%. Feeding that same 15.24% rate back into the NPV formula, with the identical investment and cash flows, gives an NPV of −₹4.16 — a few paise from exactly zero, not a coincidence but the entire definition of IRR playing out with real numbers.

Why the result isn't exactly zero

The tiny −₹4.16 gap comes from rounding: IRR is displayed to 2 decimal places (15.24%, not its full unrounded bisection result), and that small rounding carries through the NPV calculation. Using the rate's full unrounded precision instead of the displayed 15.24% would close this gap to effectively nothing.

What happens on either side of the IRR

Discounting that same investment's cash flows at 10% — below the 15.24% IRR — gives a real positive NPV of ₹13,723.60. Discounting at 20% — above the IRR — gives a real negative NPV of −₹10,281.64. The IRR sits exactly at the crossover point between these two real, independently computed results: NPV positive below it, negative above it, and essentially zero right at it.

Why this matters for reading either number

Someone who only has an NPV at one discount rate doesn't know how much room there is before the investment stops being worthwhile. IRR answers that directly: it's the exact rate ceiling (or floor, from a cost perspective) beyond which the same cash flows turn unprofitable — a single number that summarizes the entire NPV curve's crossover point.

A practical way to sanity-check an IRR result

Running a computed IRR back through the NPV calculator with the same cash flows, and confirming the result lands at (or extremely near) zero, is a genuine cross-check that two independently-implemented calculations — one solving by bisection, one computing directly — agree on the same underlying investment.