{"id":328,"date":"2019-09-14T17:36:12","date_gmt":"2019-09-14T21:36:12","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/?post_type=chapter&#038;p=328"},"modified":"2020-10-31T16:14:47","modified_gmt":"2020-10-31T20:14:47","slug":"topic-7-1-financial-discount-rates-and-calculation-of-net-present-value-npv","status":"publish","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/chapter\/topic-7-1-financial-discount-rates-and-calculation-of-net-present-value-npv\/","title":{"raw":"Topic 7.1: Financial Discount Rates and Calculation of Net Present Value (NPV)","rendered":"Topic 7.1: Financial Discount Rates and Calculation of Net Present Value (NPV)"},"content":{"raw":"A major impediment to the application of silvicultural treatments is that the benefits are enjoyed long after the costs are borne, and people prefer to receive the benefits sooner rather than later. This \u201ctime value\u201d of money (i.e., benefits) is referred to by economists as the \u201cdiscount rate.\u201d Knowing the discount rate and the timing of expenditures allows calculation of the \u201cnet present value\u201d (NPV) of an investment as:\r\n\r\n<img class=\"alignnone wp-image-392 size-full\" src=\"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-content\/uploads\/sites\/689\/2020\/10\/figure_7.1.png\" alt=\"Figure 7.1\" width=\"848\" height=\"134\" \/>\r\n\r\nFor a discount rate of 0, regardless of the time horizon, the NPV is the arithmetic total of financial costs and benefits. Some people quite reasonably argue that in the interest of inter-generational equity, the future shouldn\u2019t be discounted, but most in a capitalistic system, discount rates are typically assumed to be positive. For example, at a discount rate of 10% (the denominator is 1.10), $1100 received in one year has an NPV of only $1000. As the discount rate increases, the value (as the NPV) of income in the future declines.","rendered":"<p>A major impediment to the application of silvicultural treatments is that the benefits are enjoyed long after the costs are borne, and people prefer to receive the benefits sooner rather than later. This \u201ctime value\u201d of money (i.e., benefits) is referred to by economists as the \u201cdiscount rate.\u201d Knowing the discount rate and the timing of expenditures allows calculation of the \u201cnet present value\u201d (NPV) of an investment as:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-392 size-full\" src=\"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-content\/uploads\/sites\/689\/2020\/10\/figure_7.1.png\" alt=\"Figure 7.1\" width=\"848\" height=\"134\" srcset=\"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-content\/uploads\/sites\/689\/2020\/10\/figure_7.1.png 848w, https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-content\/uploads\/sites\/689\/2020\/10\/figure_7.1-300x47.png 300w, https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-content\/uploads\/sites\/689\/2020\/10\/figure_7.1-768x121.png 768w, https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-content\/uploads\/sites\/689\/2020\/10\/figure_7.1-65x10.png 65w, https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-content\/uploads\/sites\/689\/2020\/10\/figure_7.1-225x36.png 225w, https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-content\/uploads\/sites\/689\/2020\/10\/figure_7.1-350x55.png 350w\" sizes=\"auto, (max-width: 848px) 100vw, 848px\" \/><\/p>\n<p>For a discount rate of 0, regardless of the time horizon, the NPV is the arithmetic total of financial costs and benefits. Some people quite reasonably argue that in the interest of inter-generational equity, the future shouldn\u2019t be discounted, but most in a capitalistic system, discount rates are typically assumed to be positive. For example, at a discount rate of 10% (the denominator is 1.10), $1100 received in one year has an NPV of only $1000. As the discount rate increases, the value (as the NPV) of income in the future declines.<\/p>\n","protected":false},"author":656,"menu_order":1,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-328","chapter","type-chapter","status-publish","hentry"],"part":81,"_links":{"self":[{"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/pressbooks\/v2\/chapters\/328","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/wp\/v2\/users\/656"}],"version-history":[{"count":4,"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/pressbooks\/v2\/chapters\/328\/revisions"}],"predecessor-version":[{"id":429,"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/pressbooks\/v2\/chapters\/328\/revisions\/429"}],"part":[{"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/pressbooks\/v2\/parts\/81"}],"metadata":[{"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/pressbooks\/v2\/chapters\/328\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/wp\/v2\/media?parent=328"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/pressbooks\/v2\/chapter-type?post=328"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/wp\/v2\/contributor?post=328"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/fode014notebook\/wp-json\/wp\/v2\/license?post=328"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}