Net Present Value Plus, or NPV+, is a new approach to benefit-cost analysis for capital projects. Virtually any entity making a capital investment – cities, states, universities – can use NPV+ to better plan for a more realistic future.
Traditionally, benefit-cost analysis uses the net present value (NPV) formula, which adds up revenue and expenditures over a period of time and discounts those cash flows by the cost of money (an interest rate). The NPV calculation effectively states the lifetime value of an investment in present terms.
NPV+ expands on the familiar NPV analysis by including unpriced factors, such as the cost of environmental degradation and benefits like ecological resiliency. In the NPV+ framework, any investment may be a “capital project.” All costs and benefits – even those where no monetary exchange occurs – are “cash flows,” and those cash flows can be evaluated using the NPV+ framework. Whether the capital project involves buying vehicles, resource-efficient buildings, land conservation or mass transit systems, NPV+ can provide more accurate and useful guidance on the long-term value of the investment.
It is often assumed that economic growth will continue at historical rates for decades to come; that fuel prices will remain affordable and grow at a moderate rate; and that some benefits and costs will continue to be externalized. To create a more realistic context for capital decisions, NPV+ uses scenario analysis to capture possible economic futures. Along with recognizing normally unaccounted-for factors, this approach offers a way to bracket potential future values of investments and obtain more accurate life-cycle accounting with more complete information (hence the “plus”). NPV+ can help policymakers and budget analysts to focus on maximizing long-term wealth and provide realistic guidance in a time of growing constraints, including higher resource costs, changing climate, and historically atypical economic performance.
Sample NPV+ Analyses
NPV+ was developed as part of a pilot project to analyze four types of spending decisions made by the state of Maryland in the United States:
- Vehicles: At what price would an electric vehicle become cheaper to own than a conventional gasoline vehicle for a general-duty, local use? How does the total cost of ownership for law enforcement use of sedans compare with SUVs?
- Weatherization: What is the long-term value of a weatherization program for low-income residents?
- Land Conservation: What is the long-term value of purchasing land for conservation, including the full ecosystem benefits?
- Facilities: Would buying a more expensive HVAC system for a new detention center pay off in natural gas and electricity savings over the system’s lifetime?
Download the summary report to see how the NPV+ analysis works and to get an idea of how NPV+ might work for you.
Read Governor Martin O’Malley’s comments about the NPV+ pilot in Maryland in Governing Magazine.
We Can Help
Global Footprint Network invites you to try NPV+ and see how it can help you identify the capital projects that will build the greatest long-term wealth and resiliency for your state, county, or city. For more information, please contact us at npvPLUS@footprintnetwork.org.
