Essays on Economic, Environmental and Social Factors That Affect the Discount Rate Assignment

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The paper "Economic, Environmental and Social Factors That Affect the Discount Rate" is a great example of ana assignment on macro and microeconomics. The Net Present Value at 12% is $535714 at the end of 10 years, taking the year of capital outflow as year zero. The spreadsheet used is copied below: Technology and Society             May-08                 Discounted Cash Flow                             in $ Year Capital Cost Benefit Net Flow Cum. Flow NPV@12% NPV@9% NPV@6% 0 1500000     -1500000 -1500000 -1500000 -1500000 -1500000 1   80000 200000 120000 -1380000 107143 110092 113208 2   100000 300000 200000 -1180000 178571 183486 188679 3   100000 350000 250000 -930000 223214 229358 235849 4   90000 450000 360000 -570000 321429 330275 339623 5   70000 500000 430000 -140000 383929 394495 405660 6   90000 450000 360000 220000 321429 330275 339623 7   90000 350000 260000 480000 232143 238532 245283 8   100000 300000 200000 680000 178571 183486 188679 9   150000 250000 100000 780000 89286 91743 94340 10   200000 200000 0 780000 0 0 0 Cumulative         535714 591743 650943                   Q1 Whether I Would Accept This Project and Why I cannot take any position on this project without knowing its qualitative aims and societal benefits. I would question cost escalations in years 2, 6, 9, and 10.

Similarly, the decline in benefits from year 6 onwards requires review. The average engineering project should keep cost escalation within inflation rates, and remain productive well beyond five years. Q 1 Net Present Value of the Project @ 9% and Whether I Would Accept It The Net Present Value at 9% would be $591743. My perspective of the project would not change in this scenario compared to the base case of 12% interest. Q 1 Net Present Value of the Project @ 6% and Whether I Would Accept It The Net Present Value at 6% would be $650943.

My perspective of the project would not change in this scenario compared to the base case of 12% interest. Q1 Effect of Discount Rate on Present Value The discount rate is a matter of macro-economics rather than engineering. It is important to discount future cash flows because interest costs are realities. I do not know if costs and benefits have made assumptions about inflation rates, or whether they have been projected at constant rates. The differences in Net Present Values at 12%, 9%, and 6% are not material considering the capital cost.

It is most likely that the qualitative objectives of the project outweigh the numbers.

References

Thorpe, D, 2002, Technology and Society, web site of the University of Southern Queensland, retrieved May 2008 from: http://ocw.usq.edu.au/course/view.php?id=14%3Cbr%20/%3E
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