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When working in IT, one frequently encounters situations where a purchasing decision needs to be made whose costs and benefits occur over an extended period of time. In my organization, we typically look at such things over three years. Under such circumstances the relative value of money now, as opposed to money in the future, becomes important.

If you have a pound today, you could invest it (in the market, say) or put it to work doing something that produces some ‘return on investment’. After a year you can expect your pound to be worth one pound + the return on investment. In other words, a pound now is better than a pound deferred until tomorrow.

Net Present Value attempts to adjust for this effect. It is calculated as follows:

where is the number of years in the future the cost/benefit is going to occur, is the rate of return if we invested the money, and is the net cash flow in year .

Say we know we must pay £100,000 per year in ongoing support costs on a storage array and the return on the money that we would otherwise expect to get is 10%.

In this analysis then, a prospective replacement disk subsystem would need to cost less than £273,554 to save money over the three years considered.

This is a simplification of course. The old and new subsystems probably have different costs in terms of heat and power to name just two other things that could be factored in.