I have searched the communities and found tons and tons of information about the calculation of NPV & IRR. But here I want to know how to get the value of the NPV & IRR from the FINANCIAL ROLLUP (hierarchy page) of an investment.
I don't believe it is stored, but calculated, and It doesn't seem to be simply the sum of all the NPV's / IRR's of the sub-investments.
Can someone point me to a document, or explain the calculation method of these?
(please only for the financial rollup of an invesmtent in Hierachy)
Help will be greatly appreciated,
You are correct that it is not stored, it is calculated. The way that NPV and IRR is calculated is somewhat more complicated than can be reviewed here, and I recommend a short visit to Wikipedia or similar site for the formulas. But, in short, they are a means of using the time value of money to determine the value of a given investment. That means that an investment whose benefits occur sooner in relation to the costs will have a higher value than one with more deferred benefits, assuming that the cost/benefit values are the same. And, you cannot simply add the NPVs of two projects to see a valid value of the combined projects, as their costs and benefits may happen over different time-frames. When projects are combined, you affect the dynamics of the time-phasing, as well as the weighting of the costs and benefits.
The NPV or IRR at a Parent level in the hierarchy is a result of first adding the time-phased costs and time-phased benefits of the child investments and then running the calculation on that combination. That result will almost always be a different value than a simple summing of the child NPV/IRR values. You can run some test cases in Excel to see the impact of combing projects.
Thanks for the explanation, John. I do understand and know that the costs and benefits (from the child and the parent investment) are all summed up at the Parent level. I'd be interested to know the dates that are used to run the calculations. The dates could be from the parent investment. I will check this and update the thread if I find an answer.
Yes, the cost and benefit dates of the child investments are rolled into the parent investment. So – if a parent investment has a benefit start date of 1/1, and ends 7/1, and the child investment has a benefit start date of 3/1, with an end of 12/31, for NPV/IRR calculation purposes of the combined investments, the benefit periods overlap from 3/1 to 7/1, and are extended to 12/31. The cost start/end dates will also similarly affect the NPV/IRR calculation.
As you are likely aware, this is somewhat different from how the Cost Plans are displayed at the Parent level. Those cost plans are determined by whatever process and set-up of the investments you have made – i.e. the child investments can be independent children, or they might be sub-projects to a parent Master project, and the aggregation of costs into the cost plans will be affected by that set-up. And, in the Hierarchy views, the costs are a straight summing of the lower level costs into the parent level.
Here's what we have currently documented about the project hierarchy. Not sure it addresses the rollup of metrics like NPV and IRR. Let us know how we can improve this information:
Manage Project Hierarchies - CA PPM - 15.3 - CA Technologies Documentation
Manage Project Hierarchies - CA PPM SaaS - 15.3 - CA Technologies Documentation
It would be almost impossible to describe every scenario that could occur in relation to the calculation of NPV/IRR with the rollup of child investments into a parent.
What you might include is a note to users similar to: “The NPV/IRR/MIRR values that are calculated at the Parent level are based on the totality of the costs and benefits over time of the values rolled into the Parent level investment. That dynamic includes the timing of when those costs and benefits occur, as well as their relative size. In cases where the child investment timing extends beyond the Self level of the parent investment, the calculation takes into account the extended time-frame.”
Your system calculations correctly account for the above dynamic, but persons who are not familiar with financial concepts can be confused at the results without more explanation – which should be kept simple and direct, as I hope the above would be. I am sure that your writers can improve on my suggestion as well.
The only other related item, which is slightly more arcane, is that you may want to include a line in the documentation that the NPV/IRR/MIRR as calculated on OOB values in CA PPM are EBITDA based; Earnings Before Interest, Taxes, Depreciation and Amortization. Where those values are needed to accurately forecast an Investments profitability, they should be added as appropriate to the cost and benefit plans.
Incidentally – I do want to mention that overall, the quality of the CA PPM system documentation has improved markedly over the past couple of years. The changes in content and presentation have been really good. For perspective, I have been working with CA PPM for 17 years, so I have seen the good, the bad and ugly here…and the current trend is way on the good side.
Thank you for your detailed feedback and your encouraging words on the PPM documentation. We have been listening to our customers and incorporating whatever feedback we can to improve the quality and overall usability of our doc set.
As for the project hierarchy docs, I will make this an action item in our backlog to include more information about the rollup of the financial metrics in the investment hierarchy.
Based on your recent feedback, we have updated the project documentation to include information on how the financial metrics (NPV, ROI, IRR) are calculated in the project hierarchy. Here are the links to the latest updated versions. Do check out the note in the "View the Project Financial Rollup" section:
Thanks for the feedback.
"The values are then rolled up to the parent investment". Does that mean, they are summed up?
To clarify that line in the note, it might read:
The Cost and Benefit values are summed into the Parent level of the Hierarchy, and the NPV, IRR and MIRR are recalculated at the Parent level.
Yes, "rolled up" does mean "summed up".
Thanks for your question.
As you can see, even with an updated documentation, people are still confused. Would be great to have a simple example of a hierarchy with like 5 levels where a detailled calculation is explained. That would remove all confusion.
Thanks for the feedback. We will look into your request for adding a simple hierarchy example to a future documentation update.
We listened to your request for documenting a simple example of a hierarchy with multiple levels where a detailed calculation is explained. Please check out our newly added heading, Example: Financial Rollup in a Program Hierarchy with Multiple Levels in the following project management topic for Classic CA PPM. The heading appears in the View Project Financial Rollup section after the note.
Manage Project Hierarchies - CA PPM SaaS - 15.4.1 - CA Technologies Documentation
Manage Project Hierarchies - CA PPM - 15.4.1 - CA Technologies Documentation
Hope this helps.
Best Regards, Sarmistha
In past versions of Niku, Clarity, CA PPM, the NPV and IRR calculations only took into account revenue stored in the Benefit Plan - any Revenue stored in the Cost Plan was ignored.
Is this still the case in 15.3?
Our Revenue is based on Cost of Good Sold - which involves quantities. The Benefit Plan does us no good as it does not allow recording of quantities or calculation of Revenue based on quantities. Cost Plan allows this, but then the numbers are ignored in financial metrics.
Since I mentioned Niku, one might deduce that I've been asking for this to be fixed for a very long time.