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Conclusion

Conclusion



The methods above which do not include values of time preference are indisputably positively biased in favor of the investment.

Table 1. Comparison of economic methods
Method Millions DKK (2002 prices) Percentage Years
Simple Investment Stream 33.1 - 7.01
Pay-off period rate of return - 14.27 7.01
Average rate of return - 11.76 7.01
NPV 3% in 2002 19.6 - 8.11
NPV 6% in 2002 10.6 - 9.66


The breakeven target in terms of years is app. 7 for the first 3 measures of calculation, and slightly higher for the 2 net present value methods of calculation.

Note that the ((Internal rate of return, IRR)) is the same across all scenarios, equivalent to 11.74 %. This (in this case) corresponds approximately to the average rate of retun.

The NPV accounts for rate of time preference by including a discount rate. For the given discount rate of 3 percent, a NPV equal to zero is the same as an investment return of 3 percent (excluding inflation). Given a normal rate of inflation of app. 2 percent, a 3 percent return on investment after inflation would roughly correspond to a 5 percent return on investment nominally, which is significantly more than can be expected from e.g. a savings account.

For the example used, the discount rate would have to be app. 3.7 percent (after controlling for inflation) for the NPV to equal zero.


Created by tanja.groth. Last Modification: Friday 02 July 2010 09:47:52 CEST by tanja.groth.