Discounting

Discounting is a method used to adjust the monetary values of economic goods from different time periods to a standard basis for comparison. It involves converting the value of cash flows occurring at different time periods to a base year value, generally the year in [Page 139]which the analysis is being conducted (i.e., present value). The calculations use a discount rate, which reflects the time value of economic resources by discounting future monetary flows to the base year or present value.

The concept underlying discounting is known as time value or time preference, which refers to the tendency for people to prefer economic benefits to accrue sooner rather than later. This preference is well supported by empirical evidence, having been a topic of discussion in economic ...