Net present value gives a dollar value for return on investment and takes into account the time value of money and the "risk" of the investment, with risk represented by the question, "what if I had invested the money in another project, in stocks or bonds, or in...?" The calculation of NPV requires that a discount rate be used. The discount rate, which is established by each institution, takes into account the inflation rate and risk of investment.
Below we show the equation and an example calculation of NPV for a new instrument.
This calculation can be done by hand, but fortunately, there are computer calculators available to make the process simple. One free site with a template for calculating NPV can be found at
https://www.omnicalculator.com/.
Net present value provides a dollar amount return on an investment. Obviously the greater the dollar amount generated the better the investment. An NPV of $2,644 is not very good if the institution is looking to make a large profit from the purchase. However, if the purchase is to provide needed services for the Providers, it at least demonstrates that after three years the purchase will not have lost money.
