How the calculation works

The calculator builds a monthly cash flow over the horizon and reads every result from it.

  • Month 0: minus the one-time investment.
  • Month m: savings in that month minus the recurring cost. Savings = the full monthly amount × m ÷ R during an R-month ramp-up, and the full amount after it.
  • Total cost = investment + recurring cost × the number of months. Total benefit = the sum of the monthly savings. Net gain = benefit − cost.
  • ROI = net gain ÷ total cost, not discounted.
  • Payback = the first month from which the running total of cash flows stays at zero or above. Discounted payback does the same with each month discounted.
  • NPV = the sum of each month’s cash flow ÷ (1 + r)m, where r is the monthly rate equivalent to your annual discount rate: (1 + annual rate)1/12 − 1.
  • IRR = the monthly rate at which the NPV is zero, annualized as (1 + monthly IRR)12 − 1. It is only shown when the cash flows change sign once, which guarantees a single answer.

Cash flows are counted at the end of each month and the investment at the start, the convention of a spreadsheet’s NPV and IRR functions with the initial amount entered separately. Taxes, depreciation, inflation and the value of anything left at the end of the horizon are not included.

Worked example

A company plans to automate service desk work. It costs $60,000 to implement and $1,500 a month in licenses, and it is expected to save $6,000 a month in contractor spend once it is fully running, after a 3-month ramp-up. The finance team uses a 10% discount rate and a 3-year horizon.

  • Savings: $2,000 in month 1, $4,000 in month 2, then $6,000 a month: $210,000 over 36 months.
  • Cost: $60,000 + $1,500 × 36 = $114,000. Net gain $96,000; ROI 84.2%.
  • Payback: the running total is −$52,500 after month 3 and improves by $4,500 a month, reaching −$3,000 after month 14 and +$1,500 after month 15: payback in month 15. Discounted at 10%, payback is in month 16.
  • NPV at 10%: $74,402, using a monthly rate of 0.797%.
  • IRR: 6.03% a month, 101.9% a year.
  • By year: −$12,000 in year 1 (including the investment), then +$54,000 in each of years 2 and 3.

A finance team would read this as a project that recovers its cost in a little over a year and clears a 10% hurdle by a wide margin. The weakest assumption is the $6,000 of savings, so check it against the contracts it is meant to replace before presenting it.

Presenting it to finance

  • Lead with payback and NPV, then ROI and IRR. Payback answers “how long is the money at risk”, NPV answers “is it worth more than it costs”.
  • Show the assumptions next to the numbers: where the savings come from, the ramp-up and the discount rate.
  • Run a downside case with lower savings or a longer ramp-up, and say what would have to be true for the project to stop paying back.
  • Compare options, not just yes or no. If the choice is between ways of doing the project, the IT TCO calculator compares their costs side by side.