Discount rate/Tutorials: Difference between revisions

Revision as of 04:22, 25 August 2008

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].

cThe present value V of a cash flow $c_{t}$ occuring after an interval of t years at a dicount rate of r is given by:

V=\left({\frac {c_{t}}{(1+r)^{t}}}\right)

The present value of a series of annual cash flows after annual intervals 0 to n is given by:

${\mbox{V}}=\sum _{t=0}^{n}{\frac {c_{t}}{(1+r)^{t}}}$

↑ [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 ]

@@ Line 12: / Line 12: @@
 :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 <ref>[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 ]</ref>
+By Evans, David J  Fiscal Studies 2005 ]</ref>.
+==The present value of future cash flows==
+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>
+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>