Net present value (NPV) is the net sum of Costs and Benefits over time, with future costs and benefits discounted to the currency at its present value. This metric provides a single monetary figure that represents the total economic value of a project, policy, or product system when accounting for the time value of money.
The concept of net present value recognises that money today is worth more than the same amount of money in the future due to its potential earning capacity and the effects of inflation. To address this temporal dimension, NPV uses Discounting to convert all future costs and benefits into their equivalent present-day values. This process involves applying discount factors that systematically reduce the weight given to costs and benefits the further they occur in the future.
In the context of Life Cycle Assessment and Cost-Benefit Assessment, net present value is particularly useful for comparing alternatives that have different cost and benefit profiles over time. For instance, one option might have higher upfront costs but lower operating costs over its lifetime, whilst another might have lower initial investment but higher ongoing expenses. By calculating the NPV of each option, decision-makers can make direct comparisons on a common temporal basis.
The calculation sums all discounted benefits and subtracts all discounted costs across the entire time period being evaluated. A positive NPV indicates that the total benefits exceed the total costs when properly accounting for time preferences, suggesting that the project or system creates net value. Conversely, a negative NPV suggests that costs outweigh benefits in present-value terms.
The choice of discount rate significantly influences the NPV calculation and can substantially affect decision-making, particularly for projects with long time horizons or significant future impacts, which is common in sustainability assessments.
