Business of Radiology 101
Net Present Value
The Net Present Value (NPV) calculation is in common use to gauge the profitability of a planned investment. NPV is calculated by “discounting” predicted future cash inflows gained from an investment back to today’s value. These discounted cash flows are summed and then the cost of investment is subtracted. NPV adjusts for the Time Value of Money by taking into account inflation, opportunity costs (i.e. the option to commit the same money in competing investment opportunities) and perceived risk in the form of the interest rate used to calculate the present value of the future cash flows (referred to as the discount rate). For example, before a radiology group decides on purchasing a new scanner, it must consider whether the amount of money used to purchase the scanner would earn more profits over a selected time period or whether investing the same amount of money elsewhere would earn an acceptable amount (often while incurring less risk) or even more money during the selected time period. If the NPV is positive, this indicates that the investment is profitable and is predicted to earn more than if the money were "in the bank” earning the discount rate as compounded interest. On the other hand, if the NPV is negative, then the investment relative to what it would yield at the discount rate would comparatively not yield as much money. NPV = Σ[ CashFlow / (1 + i)t… ] i = Discount Rate t = # of compounding intervals (usually months/quarters/years)