You can use several formulas for investment analysis. The
formulas are to be used for the standard investment analysis model,
which has a value stream, Revenue (R), and two cost streams, Development
Cost (D) and Maintenance Cost (M).
- Net Present Value (NPV)
- The Net Present Value is the sum of discounted value streams minus
the sum of discounted cost streams. NPV is calculated by summing all
of the cost and benefit streams in a time grid from today through
the end of the project. The High, Likely and Low values are randomly
sampled thousands of times to produce a distribution of their value
for a given period of time. The Actual is a past value and is not
included in the result.
- Internal Rate of Return (IRR)
- The Internal Rate of Return is the rate for which the NPV equals
zero. For the NPV in a standard investment analysis model, the IRR
is calculated by using this formula to find r:
Note: The formula does not have a closed form solution. The
value of r is approximated by using calculations.
- Return on Investment (ROI)
- The Return on Investment is the gain from an investment minus
the cost of the investment, divided by the cost of the investment.
This formula takes the discounting into account, as does ROI in investment
analysis model. To calculate the ROI from the start to finish of the
project, use this formula:
- Payback period
- The Payback period is the period in which the benefits first exceed
the costs for the project. For example, if j time periods elapse
before the sum of benefits exceed the sum of costs, the payback period
is j. When the payback period is computed, discounting is also
included in the calculation.