This appendix describes the formulas and calculations for the financial metrics in Oracle Project Portfolio Analysis.
This appendix covers the following topics:
Oracle Project Portfolio Analysis uses formulas to calculate the financial metrics that it uses to analyze portfolios. This appendix describes the financial metrics in the product, and explains the formulas that are used to determine their values.
The financial percentile for a project is determined by: (1) ranking the projects, highest to lowest by net present value, and then (2) performing this calculation:
Financial percentile = (((A-B)/A)*100)
In this formula, A represents the total number of projects and B represents the project rank.
The funding variance for a scenario or investment class code is calculated using this formula:
Funding variance = funds required - funds available
The funds required for a project are the sum of costs that are scheduled to occur within the funding periods of a planning cycle.
| Period | Cost |
|---|---|
| Year 0 | 1500 |
| Year 1 | 500 |
| Year 2 | 600 |
| Year 3 | 800 |
| Year 4 | 700 |
| Year 5 | 600 |
| Year 6 | 1000 |
In this planning cycle, Year 1 is the Funding Period From period, and Year 2 is the Funding Period To period.
Using the formula, Funds required = 500 + 600 = 1100
The internal rate of return is the discount rate at which the present value of future revenues of a project, investment class code, or scenario is equal to the present value of future costs of the project, investment class code, or scenario.
The following example displays the periods, revenue, and present values for projects in the scenario Increase Margin:
| Period | Income | Present Value at 5% Discount Rate | Present Value at 6% Discount Rate |
|---|---|---|---|
| Year 0 | -1000 | -1000 | -1000 |
| Year 1 | 200 | 190.48 | 188.68 |
| Year 2 | 200 | 181.41 | 178 |
| Year 3 | 200 | 172.77 | 167.92 |
| Year 4 | 200 | 164.54 | 158.42 |
| Year 5 | 200 | 156.71 | 149.45 |
| Year 6 | 200 | 149.24 | 140.99 |
| Total | 200 | 15.14 | -16.54 |
Using an annual discount rate of 6%, the project investment's present value is less than zero. Using an annual discount rate of 5%, the project investment's present value is greater than zero. A discount rate between 5 and 6 percent returns a present value of zero.
The investment index for a project is calculated using the following formula:
Investment index = (strategic weight) * (strategic percentile) + (financial weight) * (financial percentile)
The following example describes the calculation of the investment index for a project.
For the planning cycle Annual Capital Spending Plan, the weight assigned to the strategic criteria is 30%, and the weight assigned to the financial criteria is 70%. If a project with a strategic percentile of 33% and a financial percentile of 67% belongs to a scenario in that planning cycle, the investment index for the project is calculated as:
Investment index = (33*.3) + (67*.7) = 56.8
The net present value of a project is the discounted cash amount of the expected net monetary gain or loss from a project. It is calculated by discounting all future revenue and costs to the present point in time, and discounting their value using based on the discount rate.
The net present value of an investment category or scenario is the sum of the discounted cash amount of the expected net monetary gain or loss from all approved projects in the investment category or scenario. It is calculated by discounting all expected future revenues and costs to the present point in time, using the discount rate.
Oracle Project Portfolio Analysis calculates the net present value of a project by (1) determining the future value of each period within the planning cycle funding periods, and (2) calculating the present value of a period within the planning cycle.
The future value of a project (S) within a planning cycle period is determined by this formula:
S = (period revenue - period costs)
After the future value is calculated, the following formula calculates the net present value for a project within a period:
Net present value = S/(1+r)*d
In this formula, S represents the future value of the project, r represents the discount rate per day, and d represents the total number of days. The total number of days is counted from the first day of the period to the present.
The payback period for a project is the total number of months starting at the Funding Period From that it takes to recover the total cost, or to attain a net present value equal to or greater than zero.
There are two approaches for calculating the payback period. If the cash flow per period is the same every year for the duration of the project, the following formula calculates the payback period:
Payback period = investment / cash flow per year
The following example describes the calculation of payback period when the cash flow per period is the same for every year of the project.
The company Vision Services is considering the implementation of a software application that costs $150,000 and will generate $50,000 in revenue for four years. Using the above formula, the payback period is calculated as:
Payback period = 150,000 / 50,000 = 3 years
A different approach is used to determine the payback period if the initial investment is spread out over several years, or if the benefits change over time. Under these conditions, the system uses this formula to calculate the payback period:
Payback period = last year with a negative net cash flow + (absolute value of net benefits same year / total cash flow the following year)
In the next example, Vision Services is considering the implementation of a software application that costs $150,000. However, instead of an equal annual cash flow, the amount of the annual cash flow varies from year to year. The annual cash flow per year is represented below:
| Year | Benefit |
|---|---|
| 1 | 60,000 |
| 2 | 60,000 |
| 3 | 40,000 |
| 4 | 20,000 |
The first step in the equation is to determine the net benefits. The net benefit is equal to the benefit minus any initial or remaining costs. The net benefit for each year is displayed in the following table:
| Year | Benefit | Initial Costs | Remaining Costs | Net Benefit |
|---|---|---|---|---|
| 1 | 60,000 | 150,000 | -90,000 | |
| 2 | 60,000 | -90,000 | -30,000 | |
| 3 | 40,000 | -30,000 | 10,000 | |
| 4 | 20,000 | 10,000 | 30,000 |
In this example, year (or period) 2 has a negative net cash flow of -$30,000 and is the last year with a negative net cash flow. The payback period is:
Payback period = 2 + (30,000/40,000) = 2.8 years
The return on investment for a project, investment class code, or scenario is calculated with this formula:
Return on investment = net present value (benefits)/present value (total costs)
The risk percentile for a project is determined by (1) ranking the projects in a scenario, highest to lowest by risk score, and then (2) performing this calculation:
Risk percentile = (((A-B+1)/A)*100)
In this formula, A represents the total number of projects, and B represents the project rank.
The strategic percentile for a project is determined by (1) ranking the projects in a scenario, highest to lowest by weighted strategic score, and then (2) performing this calculation:
Strategic percentile = (((A-B)/A)*100)
In this formula, A represents the total number of projects, and B represents the project rank.
Sunk costs are the sum of costs that occurred before the planning cycle funding period. Sunk costs include both actual and committed costs.
The following example lists the periods and costs for the scenario project Q1 Capital:
| Period | Cost |
|---|---|
| Year 0 | 1500 |
| Year 1 | 500 |
| Year 2 | 600 |
| Year 3 | 800 |
| Year 4 | 700 |
| Year 5 | 600 |
| Year 6 | 1000 |
In this example, the funding periods are from Year 1 through Year 5. The sunk cost for this project is equal to 1500 (the costs that occurred before Year 1).
In Oracle Project Portfolio Analysis, the total cost for a project is the sum of estimate to complete and the sunk costs. Total cost is calculated using the formula:
Total cost = estimate to complete + sunk cost
The following example displays the periods and costs for a project for planning cycle Annual Capital Spending Plan:
| Period | Cost |
|---|---|
| 0 | 1,500 |
| 1 | 500 |
| 2 | 600 |
| 3 | 800 |
| 4 | 700 |
| 5 | 600 |
| 6 | 1,000 |
In this example, Year 1 is the Funding Period From period, and Year 5 is the Funding Period To period. The total cost for this project is:
In this example, Year 1 is the Funding Period From period, and Year 5 is the Funding Period To period. The total cost for this project is:
Estimate to complete = 500 + 600 + 800 + 700 + 600 = 320
Total cost = 3200 + 1500 = 4700
The weighted strategic score of a project is the weighted score across strategic groups within the project. The formula used to calculate the weighted score of a strategic group is:
Weighted score of a strategic group = (score for objective 1 * weight for objective 1) + (weighted score of strategic group N * weight for objective N)
After determining the weighted score for the strategic groups, the following formula calculates the weighted strategic score for the project:
Weighted strategic score of a project = (weighted score of strategic group 1 * weight for strategic group 1) + (weighted score of strategic group N * weight for strategic group N)
The following example describes the calculation of weighted strategic score for the project Q1 Capital.
The strategic group named Risk contains the strategic objectives Project Longevity and Expected Improvement. The scores and weights of these two objectives for project Q1 Capital are:
| Project Longevity | Expected Improvement | |
|---|---|---|
| Score | 9 | 8 |
| Weight | 35% | 65% |
To calculate the weighted score for the Risk, insert the values into the formula. The weighted score = (9*.35) + (8*.65) = 8.35.
The same project has weighted scores for a total of four strategic groups. The strategic objectives and scores are:
| Risk | Operation Impact | Technical Fit | Market Fit | |
|---|---|---|---|---|
| Score | 8.35 | 8 | 9.6 | 7.8 |
| Weight | 20% | 5% | 10% | 65% |
Insert the values into the formula that calculates the weighted strategic score for the project. The weighted strategic score = (8.35*.2) + (8*.05) + (9.6*.1) + (7.8*.65) = 8.1.