There is something many investors overlook when evaluating their projects: the critical difference between looking at how much money they will make and how quickly they will make it. That is exactly what separates VAN from TIR, and believe me, understanding this can completely change how you make investment decisions.

Let’s start with the basics. Net Present Value, or VAN, is pretty straightforward: it tells you whether a project will leave money in your pocket or not. It works like this: you take all the cash flows you expect to receive in the future, discount them to their present value (because money today is worth more than money tomorrow), subtract what you initially invested, and that’s it. If you end up with a positive number, the project is profitable. If it’s negative, you’d better look elsewhere.

The formula is: VAN = (Cash Flow Year 1 / (1 + Discount Rate)^1) + (Cash Flow Year 2 / (1 + Discount Rate)^2) + ... - Initial Investment. It may seem complicated, but what really matters is that the discount rate you choose has a huge impact on the result. Here’s the first problem: that rate is subjective. You choose it based on your risk analysis, but another investor might choose a different one and reach opposite conclusions about the same project.

Let’s go through a practical example. Say you invest $10,000 in a project that generates $4,000 at the end of each year for five years, with a discount rate of 10%. When you run the numbers, the present value of those cash flows is approximately $15,162. Subtract your initial investment and you get a VAN of about $2,162. Profitable project—go ahead.

Now, the Internal Rate of Return, or TIR, is different. Instead of telling you the value in dollars, it tells you the percentage return you expect to get. It is the rate that makes the VAN exactly zero. If your TIR is higher than your reference rate (say, what a Treasury bond would pay you), then the project is worth it.

Here’s where it gets interesting: VAN and TIR can give you contradictory answers. One project might have a higher VAN but a lower TIR than another. Why? Because they measure different things. VAN gives you an absolute amount of gains, while TIR gives you a relative percentage. If you’re comparing projects of different sizes, this can be problematic.

The limitations of VAN are several. First, it depends heavily on the discount rate you select, and that’s quite subjective. Second, it assumes your cash flow projections are accurate, which is almost never true in the real world. Third, it doesn’t account for inflation or the flexibility to change direction during the project. And fourth, it’s not ideal for comparing projects of very different sizes.

TIR has its own problems. Sometimes there isn’t a single TIR for a project, especially if the cash flows are irregular. It also assumes you will reinvest positive cash flows at the same rate of return, which rarely happens. And here’s the key point: TIR doesn’t always correctly reflect the time value of money in inflationary contexts.

So what do you do when VAN and TIR say different things? The answer is that you shouldn’t choose just one. You need to look at both together. If cash flows are volatile and the discount rate is high, VAN could be negative while TIR remains positive. In those cases, adjust your discount rate and revisit your assumptions.

The real strategy is to use VAN and TIR as complementary tools, not as competitors. VAN tells you whether the project creates absolute value. TIR tells you what the relative profitability is. Complement both with other indicators such as ROI, payback period, or the profitability index (índice de rentabilidad).

What many investors don’t consider is that these tools are based on future projections, and the future is uncertain. Before committing money to any project, you need to conduct a thorough assessment of your own financial goals, risk tolerance, available budget, and how this project fits into your overall portfolio. VAN and TIR are excellent for filtering opportunities, but they are not the only answer.