IRR Contribution Analysis

IRR Contribution Analysis helps understand the drivers of the total entity level IRR. The contributions are computed independently at each level in the classification.

The first step is calculating the IRR at the Total portfolio level. The IRR can be computed using Bisection Interval or Directional Exponential Resolver methods. In the next step, the Profit and Loss (PnL) is calculated at each level in the portfolio as follows:

PnL_i = EMV_i – BMV_i – Σ Cash flows_i

PnL_Total = EMV_Total – BMV_Total – Σ Cash flows_Total

where BMV and EMV refer to the Begin Market Value and End Market Value.

The Average Invested Capital (AIC) is calculated from the PnL and IRR at each level in the classification independently using the following formula:

AIC_i  = PnL_i / IRR_i

Finally, the IRR contribution is calculated using the following formula:

IRR Ctr_i = (AIC_i / AIC_Total) * IRR_i

The sum of IRR Contributions at each level in the tree reconciles with the IRR computed at the total entity level.

To enable the IRR Contribution analysis, go to the Performance IRR Analysis Field and select the IRR Contribution option from the Calculate drop-down list.

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