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.