Discounting and Compounding | EME Geo-Resources Evaluation and Investment Analysis
(1) Discounting is the inverse of compounding. Compounding gives us the future value of an amount of sum we invest today, while discounting gives us the. Discounting provides a mechanism for comparing benefits and costs incurred in different time periods. It is basically the reverse of compounding, so let's explain. Combined Code, commercial bank, 4 commitment and trust relationships, , –, , complete market, compounding, 17 discounting ( factor), 45, 52, 75 discounting cash flows (methods), 75, and following,
Indeed, most people believe they are entitled to a risk-free, pollution-free environment, and are unwilling to countenance any political compromising of these rights. These unrealistic expectations are rarely challenged. Consequently, we have had various economically inefficient policies such as the Delaney Amendmentonly recently repealed, which banned food additives that could be shown to cause tumors in lab animals at any dosage that rule out any comparison of benefits versus costs.
Although the costs of the Delaney Amendment preventable obesity, nutritional deficiencies, spoilage, illnesses and deaths from food-borne pathogens almost certainly exceed its benefits, it took 40 years for Congress to muster the political courage to repeal it.
A related problem involves uncertainty.
B-C analyses can only be as good as the scientific data they rely on, and the chain of causality between the policy implementation and the desired outcome can be long and tenuous. For example, the link between a policy reduce emissions from a company's smokestack by fifty percent, say and its intended results reduce the incidence of lung cancers by 2 in 10, depends on understanding 1 the climatologic and engineering processes explaining how the smokestack controls will reduce ambient concentrations of the pollutant, 2 the geographic and socioeconomic links explaining how reducing ambient concentrations will reduce human exposures, and 3 the epidemiologic links between reduced exposures and reduced incidences of cancers.
Difference Between Compounding and Discounting
Experts may be required to elucidate the causalities at each step, and the uncertainties get compounded at each step. In the absence of data, everyone is an expert. True experts will generally qualify their findings with appropriate caveats, disclose areas of uncertainty, and concede the technical limitations of their analyses forthrightly.
Unfortunately, a nuanced presentation may not carry the day against dramatic oversimplification in a highly politicized debate.
Public trust in experts appears to have declined over the last two decades. US courts have been slow to reject the junk science, bad statistics and other nonsense peddled by so-called "expert witnesses" who are paid to support one side or the other in litigation.
Public risk perceptions are often inconsistent with experts' risk assessments.Finding Discounted Values or Finding the Principal in Compound Interest
People naturally discount mundane risks, including risks they undertake voluntarily, while they exaggerating the significance of statistically trivial but exotic risks, particularly if they are incurred involuntarily or provoke dread. They ignore experts who say they should focus less on carjackings and terrorist attacks, and more on quitting smoking and wearing seat belts. The B-C framework is supposed to compare all benefits and costs associated with policy choices in monetary units, but some elements such as the values of saving habitats for endangered species, preventing cancers or saving human lives are difficult to translate into money terms.
In fact, attempts to do so often elicit expressions of moral outrage, and some opponents of B-C analysis misrepresent it as morally corrupt. The economic valuation of lives does not involve any moral judgment by the analyst.
Rather, it is based on observations of statistical risks people incur voluntarily. Voluntary acceptance of risk implies a self-valuation of one's health or life in statistical terms.
Difference Between Compounding and Discounting (with Comparison Chart) - Key Differences
Some people win from the proposed project; others lose. The standard Hicks-Kaldor efficiency criterion suggests that if the winners could compensate the losers and still be better off, the project is worthwhile. Whether the winners actually should compensate the losers is another issue.
In order to evaluate the project, time value of money should be taken into consideration, and values should have the same base. Assume you temporarily worked in a project, and in the end which is present timeyou are offered to be paid dollars now or dollars 3 years from now. Which payment method will you chose? In order to decide, you need to know how much is the value of dollars now, to be able to compare that with dollars. To calculate the present value of a money occurred in the future, you need to discount that to the present time and to do so, you need discount rate.
It is the interest rate that brings future values into the present when considering the time value of money. Discount rate represents the rate of return on similar investments with the same level of risk. With the following fundamental equation, present value of a single sum of money in any time in the future can be calculated.
It means a single sum of money in the future can be converted to an equivalent present single sum of money, knowing the interest rate and the time. This is called discounting. Present single sum of money. A future single sum of money at some designated future date.