Can anyone please give me the formula and explain how IRR is calculated in below example?
Cost Plans 1: License Cost
Cost Plan 2: Resource Plan
Benefit Plan :
System calculated values;
Hi Geeky,
From the documentation, the Internal rate of return (IRR) is the annual interest rate required to achieve an NPV of zero.
IRR helps to determine which demands can deliver higher rate of return in terms of revenue.
The formula of IRR is explained here.
Have a nice day.
Best regards,
Jorge de Araujo
ServiceNow PPM Expert
Hi Geeky,
Sorry for the delay.
It's complicated to explain the method to get those 654,6% of IRR.
Let's try to explain the concept:
1. First try to calculate the NPV (Net present value)
To do that, you must put all the net cashflows at same period with this formula:
Net cash flow = Benefit plan - Cost plan 1 - Cost plan 2 (per period)
Then, you need to discount according each period:
Net cash flow of period 1 / (1 + discount rate) ^ period 1
Note: the discount rate should be used according the selected period (e.g. monthly rate if monthly periods).
Example: (1764,71-600-476,19) / (1 + 10%/12) ^ 1 + .... + (1764,64-600-476,19) / (1 + 10%/12) ^ 18 = 7161,62
2. The IRR is the rate that generates a NPV equal to zero
If you replace 10% by 654,6% in the last formula, you should get a NPV = 0.
To get this 654,6% rate, the formula you should resolve is :
(1764,71-600-476,19) / (1 + R /12) ^ 1 + .... + (1764,64-600-476,19) / (1 + R /12) ^ 18 = 0
Try to find the value of the "R" variable 😉
3. The meaning of IRR
When the investors/sponsors ask for a return rate less than the IRR, it sounds good: your project is profitable!
If the investors/sponsors are asking for an higher rate than the IRR, you will most likely not obtain the investment: it's not profitable for them.
Have a nice day.
Best regards,
Jorge de Araujo
ServiceNow PPM Expert
