Net Present Value (NPV) analysis is the process of taking a current investment (in this case the replacement gilt), and projecting the future net income from this investment. The calculation includes the price received for market hogs or weaned pigs (or a combination of both) on the income side of the equation, and feed costs, facility expenses, genetic premiums, etc. on the expense side to arrive at the net value, then converting these future earnings into present-day dollars. Future dollars are converted to present-day value because a dollar today is worth more than the same dollar tomorrow. This concept is known as discounting.
NPV is the amount of money an investment is worth in today's dollars, taking into account the amount of the investment, the length of the investment, how long it takes the investment to return a profit and the cost of money (interest and risk). Put another way, NPV is the current amount of money you would pay for a future investment (always some fraction smaller than one).
Pork producers can use NPV analysis when making purchasing decisions or for evaluating replacement animals from different sources and whose initial costs vary. Additionally, a NPV analysis allows producers to compare a variety of situations. For example, you could compare gilts from different genetic lines that have differing productivity levels, projected length of service, feed conversions and purchase prices. NPV helps determine which investment is the most profitable for your operations.
An NPV greater than zero indicates that an investment will be profitable when all of the above factors are considered. An NPV of less than zero indicates that an investment will not be profitable when all factors are considered. When several investments are considered, the alternative with the highest, positive NPV is the most profitable.
When we examine the NPV of in-house production of replacement gilts, ideally we want to reach the highest NPV possible.
If we look at NPV from a sow longevity point of view, culling at a lower parity results in fewer litters, making it difficult for a sow to offset the cost of producing or purchasing her.