Crystal Reports and Financials: NPV, #02

Because NPV tells you the time value of money and allows you to balance investment against cashflow, it's the basis for financial decisions in corporations.

Many people submit spending proposals or capital requests using irrelevant measurements, such as:

• Payback. This is great for a general idea approach. But you can't finance based on it, because it doesn't address cashflow, ROI, or the cost of capital.
   

• ROI. The Return on Investment helps managers evaluate projects based on how well their efforts pay off. But 5% of 1 million dollars is quite a bit more money than 20% of 100 dollars. Which is one reason you can't finance based on ROI.
   

• IRR. This is a variation of ROI, and fails as a project financing metric for the same reason. However, IRR takes into account the cost of capital--something a simple ROI calculation does not. And this can be a huge factor. You can use IRR to compare projects that are roughly the same cost.

In a report, you could show these figures as supplemental information. But generally, it's better to leave them out entirely. Why? Because they could improperly influence a decision that needs to be made on a cashflow basis.

For a report to serve as business intelligence, it needs to focus on answering specific questions as clearly and succinctly as possible. A data dump really doesn't help anybody, though it could make the report appear to be more authoritative by bulking it up. Adding irrelevant facts and figures, however, is a counterproductive way to achieve the goal of being authoritative.

A better way to give your report cachet is to include subreports that provide alternative analysis.

For example, for Project X, your report shows the salient facts and presents the NPV. You could have subreports showing alternative NPV scenarios if Facts, A, B, or C change from X to Y. The one fact most likely to change is the revenue projection in the cashflows. A report that shows three NPVs, based on optimistic, most likely, and pessimistic cashflow projections respectively, provides a fairly comprehensive picture to the decision-makers.

How does this differ from merely adding in those other measurements? Because it allows a decision maker to compare alternative strategies that are measured the same way.

If you want a report that is longer, stick with the concept of business intelligence rather than distracting data as the "stuff" to add to it.

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