Net present value gives a dollar value for return on investment and considers the time value of money and the "risk" of the investment. Risk is represented by the question, "What if I had invested the money in another project, in stocks or bonds, or in...?" Calculating NPV requires using a discount rate. Each institution establishes a discount rate, considering the inflation rate and investment risk.
Below, we show the equation and an example calculation of NPV for a new instrument.
This calculation can be done by hand, but fortunately, computer calculators simplify the process. One free site with a template for calculating NPV is
https://www.omnicalculator.com/.
Net present value provides a dollar amount return on an investment. The greater the dollar amount generated, the better the investment. An NPV of $2,644 is not very good if the institution wants to profit significantly from the purchase. However, if the purchase is to provide needed services for the providers, it demonstrates that after three years, the purchase will not have lost money.
