Speaker: Nina Anchugina
Affiliation: PhD student, Department of Mathematics
Title: Evaluating Long-Term Investment Projects: What Should The Discounting Method Be?
Date: Wednesday, 27 Aug 2014
Time: 4:00 pm
Location: CAG17/114-G17 (Commerce A)
Increasingly today there is a necessity to evaluate projects, policies and activities, whose consequences will be spread over a long period of time.
Projects are usually analysed by converting the future values into present values by attaching some weight to each period; this procedure is known as discounting. Several methods of discounting have been developed but a universal one does not exist. The choice of discounting method, however, may be vital for deciding whether a certain project should be implemented or not. The question is: Which method of discounting should be used when evaluating long-term public projects?
In this talk we will firstly consider two main types of discounting, namely exponential and hyperbolic discounting, their functional forms, properties and implications. I will provide an example which illustrates how the choice of discounting method appears to be crucial for making a decision. Secondly, we will analyse an appropriate social discount function for a public project implied by an aggregation of the individual discount functions. Finally, we will investigate the situation when there is an uncertainty about discount rates for exponential discounting, which is a common case for long-term projects. I will also present some new results on the choice of a discount rate of the hyperbolic discounting when there is uncertainty about future rates .