# How is the Net Present Value (NPV) being calculated? (Version 8.x-12.1)

 Document ID : KB000023680 Last Modified Date : 22/03/2018 Show Technical Document Details
Introduction:

#### Description:

CA Clarity™ PPM Financial Metric computations for versions 8.x through 12.1.x

In Clarity, the Net Prevent Value (NPV) is the difference between the sum of the Present Value of Revenue and the sum of the Present Value of Costs.

In Clarity, the Return On Investment (ROI) is the ratio between the Net Present Value and the sum of the Present Value of Costs.

The computations are using daily amounts rolled into monthly periods.

#### Solution:

Calculations within Clarity for these values are accomplished as follows:

1. Administration, System Options, Cost of Capital %

The value that is entered in this field is an Annual Percentage Rate (APR)

2. Monthly Cost of Capital = Cost of Capital / 12 months (aka: comparison yield)

3. Total Planned Cost:

When using only the Simple Budget page, this is the value that is entered by the end-user in the Planned Cost field.

When using Detailed Financial Planning, Planned Cost is displayed on the Simple Budget Page as read-only, it is calculated as follow:

1. For Clarity 8.x up to 8.1 FP03, this is the cost of the current approved budget, plus the cost of any periods in the Cost Plan "Plan of Record" (POR) that are not already included in the budget.

For example, if the budget runs from January - March, and the POR runs from January - August, the Planned Cost is the budget amount of January - March, plus the amount of the POR periods from April - August

2. For Clarity 8.1.1 and above: this is Cost Plan Plan of Record

Note: due to a defect, the calculation of Planned Cost for 12.0.3 and 12.0.4 were reverted back to the method used for 8.x up to 8.1 FP03; this defect was resolved on 12.0.5.

4. Total Benefit / Revenue

When using only the Simple Budget page, this is the value that is entered by the end-user in the Planned Benefit field.

When using the Detailed Financial Planning, this is the calculated total benefit from the Benefit plan Plan of Record (POR)

5. The Present Value of Revenue is calculated as follows:

1. Total Number of Periods (in months) = (Planned Benefit Finish date - Planned Benefit Start Date) + 1

2. Revenue Per Period = Total Revenue / Total Number of Periods

3. Present Value of Revenue for each Month (period) = Revenue Per period / ((100% + Monthly Cost of Capital%) raised to the power of the period number)

6. The Present Value of Cost is computed as follows:

1. Total Number of Periods (in months) = (Planned Cost Finish date - Planned Cost Start Date) + 1 ( NPV is impacted based on the first detailed period that has got non zero values. The actual first detailed period has a significant impact on the both NPV and the payback period.)
2. Cost Per Period = Total Cost / Total Number of Periods

3. Present Value of Cost for each Month (period) = Cost Per period / ((100% + Monthly Cost of Capital%) raised to the power of the period number)

7. Net Present Value (NPV) = Present Value of Revenue - Present Value of Cost

8. Return on Investment (ROI) = NPV / Present Value of Cost

If the date range for the Planned Costs and the date range for the planned Benefit match, the ROI will not vary when the Cost of Capital varies.

Note: The following rules are applied for calculating IRR, MIRR, Payback Period, and other metrics for investments that include child investments. The financial metrics are calculated based on the aggregated amount of the projects and subprojects.

In the investment hierarchy, the financial metrics show for the investment itself and rolled up next to the parent investment.

• Cash flow starts from the first fiscal time period where the cost plan starts relative to all investments.
• The initial investment is the sum of the initial cost of all investments, including child investments.
• When a main investment or any child investment has no planned costs, zero is used in the metric calculations.
• The reinvestment rate and the total cost of capital for the top-level main investment are considered in the MIRR calculation.

For more information, reference TEC435561: Example Net Present Value for v8.x - v12.1

Instructions: