Microsoft Word 2012, Källén, M.,-Energy Efficiency Opportunities within the Heat Treatment Industry

2.7.2  Net Present Value 

The net present value is the difference between the investment and the present value of future 

cost savings due to the investment. The present value of future cost saving is calculated with 

an interest rate, usually the cost of capital. The net present value is calculated according to: 

 

 

 

 

∑

 

 

 

 

 

(10) 

where 

 is the net present value,   is the time frame for the calculation,   is the annual 

cost saving due to the investment,   is the cost of capital and   is the total investment cost. 

This method considers the time value of money and accounts for all cash flows during the 

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time frame for the calculation. It can be used to evaluate an investment and to compare the 

profitability between investments. A good investment will have a high net present value. [12] 

Another way to compare investments is to calculate the net present value ratio which is the 

net present value divided with the initial investment according to: 

 

 

 

 

 

 

 

 

 

 

(11) 

where 

 is the net present value ratio, 

 is the net present value and   is the total 

investment cost. A higher net present value ratio indicates a more profitable investment. 

 

 

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