Discount rate/Tutorials: Difference between revisions
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imported>Nick Gardner (Present value) |
imported>Nick Gardner |
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cThe present value V of a cash flow <math>c_t</math> occuring after an interval of t years at a dicount rate of r is given by: | cThe present value V of a cash flow <math>c_t</math> occuring after an interval of t years at a dicount rate of r is given by: | ||
:<math>V = \left (\frac{c_t}{(1+r)^t}\right)</math> | ::<math>V = \left (\frac{c_t}{(1+r)^t}\right)</math> | ||
The present value of a series of annual cash flows after annual intervals 0 to n is given by: | The present value of a series of annual cash flows after annual intervals 0 to n is given by: | ||
<math>\mbox{V} = \sum_{t=0}^{n} \frac{c_t}{(1+r)^{t}}</math> | ::<math>\mbox{V} = \sum_{t=0}^{n} \frac{c_t}{(1+r)^{t}}</math> | ||
Revision as of 04:23, 25 August 2008
The Ramsey equation
The social time preference rate, s, is given by:-
- s = δ + ηg
where:
- δ is the pure time preference rate (otherwise known as the utility discount rate);
- η is the elasticity of marginal utility with respect to consumption; and,
- g is the expected future growth rate of consumption.
Evidence based upon the structure of personal income tax rates suggests that the value of η for most developed countries is close to 1.4 [1].
The present value of future cash flows
cThe present value V of a cash flow occuring after an interval of t years at a dicount rate of r is given by:
The present value of a series of annual cash flows after annual intervals 0 to n is given by:
- ↑ [http://www.allbusiness.com/public-administration/administration-economic-programs/1082042-1.htmlThe Elasticity of Marginal Utility of Consumption: Estimates for 20 OECD Countries* By Evans, David J Fiscal Studies 2005 ]