+ Reply to Thread
Results 1 to 2 of 2

How do I calculate NPV with The social marginal rate of time preference and no infl?

  1. #1
    Registered User
    Join Date
    02-20-2012
    Location
    Aarhus, Denmark
    MS-Off Ver
    Excel 2010
    Posts
    1

    How do I calculate NPV with The social marginal rate of time preference and no infl?

    How do I calculate NPV with The social marginal rate of time preference and no inflation?

    Hi,

    I need to calculate the NPV of a project where The social marginal rate of time preference is assumed to be 5 per cent in real terms.
    The initial investment is 1,000 $, and the investment will insure a stream of benefits from time period one to infinity – where the annual benefit will be 60 $.

    Can anyone help how to figure this out? And maybe give another example where inflation is taken into account as well?

    Thank you in advance!

  2. #2
    MoneyMaker
    Guest

    Re: How do I calculate NPV with The social marginal rate of time preference and no in

    A infinite stream of cash flows form what you call a perpetuity and it's present value is found by ratio of perpetuity amount over interest rate. Yet since we also have a cost of perpetuity and the task is to find net present value of perpetuity thus you have you use the following formula

    NPV (perpetuity) = Cf0 + [Cf1->INF]/rate
    NPV (perpetuity) = -1000 + 60/5%
    NPV (perpetuity) = -1000 + 60/0.05
    NPV (perpetuity) = -1000 + 1200
    NPV (perpetuity) = $200

    Thus a perpetuity that costs a $1000 and pays $60 forever at a rate of 5% is worth only 200

    If inflation were to be taken in to consideration I would assume one would add the inflation rate to the marginal rate of time for discounting the perpetuity

+ Reply to Thread

Thread Information

Users Browsing this Thread

There are currently 1 users browsing this thread. (0 members and 1 guests)

Tags for this Thread

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts

Search Engine Friendly URLs by vBSEO 3.6.0 RC 1