Present Value Of Net Benefits

The present value of net benefits (PVNB) shows the worth of a project in terms of a present-value sum. The PVNB is determined by calculating the present value of all benefits; doing the same for all costs; and then subtracting the two totals. The result is an amount of money that would represent the tangible value of undertaking the project. This comparison evaluates all benefits and costs at their current or present values. If the net benefit (the benefits minus costs) is greater than zero, the project is worth undertaking; if the net is less than zero, the project should be abandoned on a financial basis. This technique is firmly grounded in microeconomic theory and is ideal for total-cost analysis (TCA). Even though it requires a preselected discount rate, which can greatly discount long-term benefits, it assures that all benefits and costs over the entire life of the project are included in the analysis. Once you know the present value of all options with positive net values, the actual ranking of equipment and technology options using this method is straightforward; those with the highest PVNBs are funded first. There are no hard and fast rules as to which factors one may apply in performing life-cycle costing or total-cost analysis; however, conceptually, the PVNB method is preferred. There are, however, many small-scale equipment projects where the benefits are so well defined and obvious that a comparative financial factor as simple as a ROI or the payback period will suffice.

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