2.8.9 Appraisals should generally include, for each option, a calculation of its Net Present Value (NPV). This is the name given to the sum of the discounted benefits of an option less the sum of its discounted costs, all discounted to the same base date. Where the sum of discounted costs exceeds that of the discounted benefits, the net figure may be referred to as the Net Present Cost (NPC). Alternatively, the term 'negative NPV' may be used.
2.8.10 The NPV is the key summary indicator of the comparative value of an option. It not only takes account of social time preference through discounting, but also, by combining capital and recurrent cost and benefits in a single present day value indicator, enables direct comparison of options with very different patterns of costs and benefits over time. For instance, it solves the problem of how to compare a low capital cost / high running cost option with that of a high capital cost / low running cost alternative.
2.8.11 The decision rule is to select the option that offers to maximise NPV, or minimise NPC. This is subject to account being taken of those impacts which can not be valued in money terms. Conceptually, these also have an NPV or NPC, but inability to express them in money terms means that they must be judged by other means, as indicated at STEP 7 below, and weighed alongside the monetary values in coming to a decision.
2.8.12 The time horizon for NPV calculations should reflect the economic life of the services being appraised, or the useful life of relevant key assets, and should be sufficiently distant to cover all the important cost and benefit differences
2.8.9 between options. For projects expected to have a very long life, the effect of shorter horizons should be illustrated for key years.
2.8.13 Discount calculations should be shown in detail. Net Present Value (NPV) calculations should show a breakdown of the main cost/benefit items covered, and how their incidence is distributed over time. In addition, SGHD generally expects the calculations to show:
(i) the discount factors used, year by year;
(ii) the total NPV (or NPC) for each individual year; and
(iii) the cumulative total NPV (or NPC), for each year of the calculations.
2.8.14 Appraisal reports should record both:-
• the price basis of the money values (i.e. the date at which prices have been held constant); and
• the base date for discounting (i.e. the date corresponding to start of the appraisal - usually the beginning of Year 0 in the NPV calculations).
2.8.15 Discount calculations are facilitated by the use of software packages or a calculator. The Generic Economic Model(GEM), developed in conjunction with Department of Health is an Excel spreadsheet suitable for the needs of NHSScotland bodies. SGHD expects the GEM to be utilised for option appraisal and for GEM outputs to be contained within business cases prepared by NHSScotland bodies. The GEM and the guidance for its use is accessible at: