When it comes to writing a business case you’re going to come across these calculations, whether you use them or not is another story.

Summary

• Use NPV and IRR calculations with caution
• Prepare and write your results with your audience in mind
• Know your data inside out
• Detail your assumptions thoroughly
• Have someone review prior to submission

 
Net Present Value and Internal Rate of Return calculations

Excel makes it very easy to plug in some numbers and get values for NPP and IRR but it’s important to understand which numbers to feed into where and what the results actually mean.

When presenting your business case the last thing you want is having someone who knows more about finance than you cast doubts over your whole presentation if you don’t understand these calculations or haven’t used your numbers correctly.

Even then, some companies have specific criteria so even if you do present valid numbers which look good to you, they may not be to the key decision makers and you may be quickly rejected based on these numbers alone.

Ultimately you’re presenting an argument to someone to make some form of investment and like any form of communication it’s important to understand your audience. Lose your audience at what NPV and IRR stand for and you’ve probably just buried your business case yourself.

 
My most recent business case involved demonstrating why one course of action should be taken over the current.

In preparing the business case I drew up a P&L statement for the proposed course of action and a second P&L statement for the current course of inaction.

This provided clear points of comparison and demonstrated a forecast value of the proposed course of action over a period of time, in this particular case 3 years – Ultimately summed up in the Executive Statement as:

“If you don’t do X you’ll end up paying an additional Y more than necessary over Z period and this is why…”

Which is more motivating? “Paying” money or “Saving” money…

Then using the P&L statement for the proposed course of action it was a relatively simple matter of identifying when break-even would occur.

Great news for this business case as this was forecast for the 9th month.

This sort of reasoning makes sense to most people, NPV and IRR values on the other hand don’t, however I was still determined to have some cool values to drop when it came presentation time.

With P&L statements ready Excel’s formulas spat out some cool numbers…

NPV – Calculates the net present value of an investment by using a discount rate and a series of future payments and income.

IRR – Returns the internal rate of return for a series of cash flows represented by the numbers in values.

…but cool for who exactly?

I had the opportunity to have someone else review* the business case beforehand and it ended up being presented without NPV and IRR values and instead with a friendlier and more readable ROI analysis.

^{*Always advisable, after all, you’ve probably been sitting in front of Excel working with numbers for several days straight by this point.}

In the end the business case achieved the desired result and the key data in the P&L statements provided could be used to have NPV and IRR values quickly calculated by finance when audited, if required.

Whilst many business cases utilise NPV and IRR calculations this is an example where it wasn’t necessary, and was in fact best not to include.