Keynote speakers Richard Catalano and David Hawkins were summarizing their well-respected program “Communities That Care.” They spoke of the net present value of cash flows. My CPA ears perked up and I suddenly became even more interested in their topic.
I used net present value formulas extensively earlier in my career when I performed financial analysis for cellular telephone companies—something I really enjoyed. The formulas were used to determine the projected profitability of different kinds of customers so that the marketing folks would focus on luring in profitable customers. Cell phone companies make an investment in new customers through subsidizing expensive cell phones and smart phones, the payment of commissions, and other marketing costs. They hope to recover these costs and make a profit through monthly service charges. So all the cash flows in and out are totaled taking into account how long the customer will remain. The analyses also factored in the time value of money: a dollar today is worth more than a dollar later so future cash flows are discounted to today’s value. The result is the projected net present value of all the cash flows related to a customer.
But back to what the conference speakers had to say. They described how using net present value calculations they’ve proved that certain prevention programs are a good investment for communities. The programs realize big savings from the prevention of crime and other societal costs in future years that are many times greater that the costs. The net present value of savings was about four dollars for every dollar of costs. What a great return!
I find their work really, really cool! Psychology meets financial analysis!
It is so wonderful that the application of science by bright, enlightened men and women has brought to us better techniques for the prevention of drug abuse and mental illness. This application has also brought us better treatments. And this has all happened in my lifetime—a short period in all of human history.
A few months ago I visited the museum at the Utah State Hospital in Provo. Among the artifacts were handcuffs, cell bars, and a wooden cage with a bed pan. As I understand it, these were thought to be the best tools available into the 1950s—the decade in which I was born.
But now psychologists—perhaps with the aid of accountants—use net present value techniques to help optimize program effectiveness. Other scientists develop treatment techniques that include psychotherapy and psychotropic medications. What a blessing! We would be wise to take advantage ourselves and to encourage others to take advantage of these advancements when mental illness strikes. Such an approach will make accountants that live with depression like me to feel really good!