Net present value

an old tool finding use in assessing public sector capital expenditures

The most effective tool for assessing risk and return for capital expenditures is net present value (NPV). This article surveys different methods for evaluating capital investments, and draws on the varied project experience of the Commonwealth of Massachusetts to demonstrate how NPV can be applied to public investments. Bonuses and penalties should aim at encouraging contractors to conform to the owner's objectives instead of the contractor's. The consequences of shortening and lengthening project schedules need to be carefully evaluated. The article presents a methodology for determining the value of time in projects that don't generate direct income, and a step-by-step process for implementation. This method enables the acceleration of the schedule in most cases, and should help non-profit organizations in developing capital project benefits and assessing the benefits and costs of schedule adjustments.
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