Which task from the 'Strategy Analysis' knowledge area requires the BA to establish 'Internal Rate of Return' (IRR) thresholds to determine if a change is worth pursuing?

Define Future State

Explanation

Defining the future state involves setting the business objectives and criteria for success, including financial hurdle like IRR.

 

The internal rate of return (IRR) is the interest rate at which an investment breaks even, and is usually used to determine if the change, solution or solution approach is worth investing in. The business analyst may compare the IRR of one solution or solution approach to a minimum threshold that the organization expects to earn from its investments (called the hurdle rate). If the change initiative’s IRR is less than the hurdle rate, then the investment should not be made. Once the planned investment passes the hurdle rate, it could be compared to other investments of the same duration. 

The investment with the higher IRR would be the better investment. For example, the business analyst could compare two solution approaches over the same time period, and would recommend the one with the higher IRR. The IRR is internal to one organization since it does not consider external influencers such as inflation or fluctuating interest rates or a changing business context. 

The IRR calculation is based on the interest rate at which the NPV is 0: 

Net Present Value = (-1 x Original Investment) + Sum of (net benefit for that period / (1 + IRR) for all periods) = 0.