How is IRR calculated?

### How is IRR calculated?

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#### Products

Clarity PPM On Premise Clarity PPM SaaS

#### Issue/Introduction

When comparing IRR values in Clarity they are not matching the Excel or other online calculations.

#### Environment

Release : All Supported Releases

Component : CA PPM FINANCIAL MANAGEMENT

#### Cause

Clarity calculations are actually based on daily periods.  However, these are aggregated to monthly when doing the actual calculations.

If using Annual periods in Clarity, in order to get the correct number in Excel, you must change the plan to monthly period in TSV and use each period in excel.

In Clarity, when using detailed plans, make sure both the cost plan and the benefit plan are done in monthly periods.

Make sure you are using the plan of record and have the benefit plan associated.

#### Resolution

1. Check for any data differences that can be causing this issue including differences in Budgeted Benefit, Budgeted NPV.
2. As per: Create Financial Summaries, below is how IRR is calculated:
• This metric displays the Internal Rate of Return (IRR).
• IRR represents the discount rate that is used to achieve zero NPV for an investment.
• Use IRR as an alternate method for evaluating an investment without estimating the discount rate.
• IRR assumes the cash flows from an investment are reinvested at the IRR.

Calculation:

• C0 is the initial investment cost (expressed as a negative number).You can define this value using the Initial Investment field on the budget properties page of an investment.
• n represents the number of periods available in the cash flow.
• Cash flow starts with the first fiscal time period of the cost plan or the associated benefit plan, whichever is earlier, and ends with the last fiscal time period of the cost plan or the associated benefit plan, whichever ends later. The cash flow for each fiscal time period equals the projected benefit less the available cost for that period. If benefit or cost is unavailable for a given fiscal time period, zero dollars is used.
• If cost and benefit are defined in budget properties of the investment, then the cost and benefit amounts are considered evenly distributed between Planned Cost and Planned Benefit start and end dates.
• If cost and benefit are defined from the detailed financial plan, IRR is based on the detailed cost plan and its associated benefit plan.
• If there is insufficient cash flow to make the investment profitable, IRR is a negative value.
• If no positive or negative cash flow exists, the IRR value is left blank.

Here is an example

1) Annual cost plan but need to change the plan TSV to monthly.

Cost plan is for year 0 and benefit plan is for following 2 years.

Cost Plan:

Monthly

Annual Benefit Plan:

Broken into Monthly:

Example of Excel

....

Excel = 5.27%

Clarity = 5.27%

If you have plans where benefits are expected while costs are still being expended (plans overlap)

Make sure in Excel that for these overlapping periods you enter the net values into the period(s).