Business of Radiology 101
Time Value of Money
Time value of money (TVM) refers to the idea that a certain amount of money today has different buying power than the same amount of money in the future. Time Value of Money accounts for the interest earned or inflation accrued over a given time period, thus allowing for the valuation of future income in present terms. For example, $10,000 today is worth more than the same amount in 5 years, owing to its greater purchasing power today due to the effects of inflation. Moreover, if the $10,000 was invested today, it has the potential to earn interest over five years. In summary, it is always important to invest unused cash or revenues in order to increase real profits in the long run.
Two common methods to evaluate the profitability of an investment are Return on Investment (ROI) and Net Present Value (NPV). Return on investment is calculated by summing the cash flows expected to be returned from an investment (i.e. the gain) and subtracting the investment cost. This difference is then divided by the investment cost, and then often multiplied by 100 to transform the fractional result into a percentage. While easy to calculate (or even estimate in your head), ROI does not account for inflation or compounding. ROI can be adjusted by multiplying by a weighting factor to approximate inflation, and then it is referred to as "adjusted ROI". ROI = (gain - cost) / cost