Idea Investment Evaluation : Helpdesk

TABLE OF CONTENTS

Overview

An Investment Evaluation assessment is a method used to determine the value or profitability of an investment by analyzing the cash that the investment is expected to generate over its lifetime based on the investment's cash. This feature is now available on the Idea Cashflow menu. The Investment Evaluation evaluates the following factors:

Initial Investment: The upfront cost of the investment.
Net Cash Flows: The difference between all the cash inflows (revenues or savings) and cash outflows (expenses) over the investment period.
Time: How long you expect to receive these cash flows.

These factors are taken into account using the following methodologies: Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period.

To access the Idea Investment Evaluation feature, kindly follow the steps below.:

Navigate to the Idea/Initiative module. This will open the list of existing Ideas/Initiatives.
Select the Idea/Initiative for which you wish to utilize the Cashflow feature, or alternatively, create a new Idea/Initiative. For guidance on how to create a new Idea/Initiative, kindly refer this article: Adding an Idea.
After opening the Idea/Initiative, click on the 3-bar menu and select the Cash Flow option.
This will open a screen similar to the one below displaying the existing cashflows of the Idea and the Investment Evaluation below the Cashflow table (to enter new cashflow entries, please see the following article: Idea Cashflow).

Investment Evaluation Grid

The Idea Investment Evaluation Grid is displayed as follows:

The 1Starting Year, positioned at the top, is determined by the start date set in your Cash Flow table, establishing the initial year for the Investment Evaluation table and its computations. The 2Discount Rate is derived from the Idea's home site configuration under investment evaluation settings (For PMO sites: Portfolios > Portfolio Configure > Configuration > Settings (under System); For CI sites: Administration > Organisational Structure (under General) > Configuration > Settings (under System)). On the top far-right of the section, the date/time when the investment evaluation was 3Last Calculated is displayed.

To accurately compute the investment evaluation, the following configurations are necessary:

4Initial Investment (Y0): Represents the initial investment amount allocated to the project.
5Years (Yn): Specifies the number of years to be displayed in the Investment Evaluation table, contingent on the selected Y1 field.
6Enable Last Period in Perpetuity: Activates the assumption that cash flows will proceed indefinitely at a uniform rate beyond the designated forecast period, stretching into perpetuity. When the option "No" is selected, the cashflow in perpetuity is not taken into account.

After setting up these parameters, proceed by clicking on 5Calculate.

7Upon completing the calculation, the ensuing data will be presented:

Cash Flow Name: Derived from the Cashflow entries found in the Cashflow table situated above the Investment Evaluation section.
Cash Flow Category: Corresponds to the Cashflow Categories listed on the Cashflow table.
Annual Growth Rate (%): The annual increase percentage for each cashflow item (if relevant), as indicated on the Cashflow table.
Y0: Represents the initial investment's value at the start of the evaluation.
Y1: Displays the total cashflows for the cashflow item.

The Total Cash Flow value for each year (including from initial investment period) will be displayed on the last row of the grid.

8Located on the bottom-right corner of the grid, the table showcases key financial metrics of the investment, including the Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and the Discounted Payback Period. For detailed insights into the methodologies behind these calculations, kindly refer to the next section)

Calculations Explained

The following Investment Evaluation methodologies are calculated as follows:

Y0: value at initial investment
Y1: sum of the total cashflow value for each cashflow item
Net Present Value: this calculation is made up of the Discount Factor and Present Value (PV)
- Discount Factor= 1/(1+r)^n
  - r is the discount rate → This is the same rate displayed on the Investment Eval toolbar
  - n is the period → This is the number of Years/ Periods in the columns mentioned above
  - E.g.: If the discount rate is r=0.1 then it will be 1/(1+0.1)^1 → Therefore Y₁ Discount Factor =0.9091
- Present Value(PV)= Total cash flows for a year/period * Discount factor
  - e.g.: Y₁ total cash flow = 76297,60 and Discount Factor =0.9091 → then 76297,60 * 0.9091 = 69361,45
- Net Present Value (NPV) = Sum of all the Present Value (PV) for each Year (incl Y₀)
  - -10000 + 69361,45 = 59361,45
Internal Rate of Return (%): To determine the IRR, we must identify the discount rate that sets the sum of the NPVs (Net Present Values) to zero, indicating the break-even point of the investment. This is accomplished through an iterative process, where different discount rates are tested until the NPV reaches zero (you can use Excel to determine the value of the IRR)

NOTE: The value will be displayed in red font if the IRR value is less than the discount rate
Payback Period (yrs): measures the time required for an investment to recover its initial cost. It calculates the length of time it takes for the cumulative cash inflows to equal or exceed the initial investment
Discounted Payback Period (yrs): extends the concept of the Payback Period by incorporating the time value of money, that is Present Value. While the traditional Payback Period focuses solely on the recovery of the initial investment, the Discounted Payback Period takes into account the present value of cash flows.

Last Period in Perpetuity

When the Last Period in Perpetuity option is enabled, meaning the Yes option is selected, it is assumed that the cash flows will continue indefinitely at a constant rate beyond the specified projection period, extending perpetually into the final time period. This impacts the calculations as follows:

Once the Last Period in Perpetuity option is enabled, the field for entering the Perpetuity Growth Rate becomes active. You can then input the desired growth rate in this field and click Calculate.
The NPV will be calculated as follows:

a) the PV for each period up to the last period BEFORE the in-perpetuity period will be calculated using the formula PV=C/(1+r)^n where:
C = the cash flow for that period
r = the discount rate
n = the period

b) The total value of perpetuity cash flows for the year before the last period, using the cash flow value from the last period, will be calculated with the formula Total value = C/(r-g) where:
C = the future period cash flow
r = the discount rate
g = the Perpetuity growth rate

c) Discount the value calculated in step 2 above using the same formula as used in step 1 above using the formula Perpetuity Cashflow (from step 2) /(1+r)^n

d) By adding all the PV values together, you get the NPV
The IRR, Payback period and Discounted payback years calculations will also be calculated differently as the Last Periods in Perpetuity value will now be considered.

Idea Cashflow