| PRINCIPIA CYBERNETICA WEB ||-|| ©|
It is assumed that a monetary unit received
today is worth more than a monetary unit to be received a year
from now. This assumption requires that, in order to determine
the present value of future sums, the analyst use an interest
rate to discount these future sums. If i is the assumed annual
interest or discount rate, expressed as a decimal, the present
value of x monetary units to be received in n years from now is
given by the formula:
Present value = X
Discount rates are used when comparing alternatives that differ
in the time-character of their flows of costs and benefits; to
compare them, costs and benefits are discounted to the same year.
There are no clear-cut rules as to what an appropriate discount
rate should be in a given case.