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An engineer at large manufacturer of hi-end S. S. appliances was considering a PSA Nitrogen Generation System for laser cutting. After having decided that the technology was good and that they would like to have a system the engineer in charge of the project said to me, "I need to justify the cost to my team to get approval. They will ask me to explain the net present value (NPV) of this investment, what can I tell them? I suggested that it was simple and by asking the following questions that it would become clear to everyone.
The team reviewed the questions and then placed an order for a system a few days later. They are running their system since early in 2005 and they have had great success with it.
NPV Net Present Value:
The present value of an investment's future net cash flows minus the initial investment. If positive, the investment should be made (unless an even better investment exists) otherwise it should not.
The difference is in how you view each of your choices.
Q#1 Is it an investment if you are spending the money regardless of whether you buy a system or not?
Q#2 Isn't the real choice; do we purchase this system using the money that we would otherwise be using to purchase a consumable that will give no return, ever?
Q#3 Are there benefits to owning this asset and having the tax depreciation?
Q#4 If you finance the system with no money down and a 5 or 7 year lease $1 buyout, isn't that no initial investment with positive future cash flows?
Q#5 Since we have been consumers of nitrogen laser cutting assist gas what have we to show for our years of investment?
Q#6 If we continue to invest in the gas supplier, what is the NPV, and how do we improve future cash flows with that investment?
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The myths about gas generation
