Discounting Costs

Most people would prefer to receive $1 today rather than $1 a year from today because a dollar received today can be invested (or put in a savings bank) and will be worth more in a year than it is today. The preference for a dollar today is called the time preference for money. In economic analysis, the time preference for money necessitates discounting future costs. The necessity for discounting is particularly important in the economic evaluation of health programs be cause in most situations involving health not all of the costs of an intervention are incurred at a single point in time, and many of the monetary benefits of an intervention are reaped in the future. Discounting cost adjusts future costs and expresses all costs and monetary benefits of an intervention in terms of their present value.

The formula for discounting is as follows:

Went = C0 + C, / (1 + ry + C2 / (1 + f)2 + . . . C„ / (1 + f)»

where cpresent is the cost in current dollars, r is the discount rate, and c0, cl5 . . . cn are costs in future years. Spreadsheet programs and business calculators will do discounting automatically.

The process of discounting at a positive rate gives greater weight to costs and monetary benefits the earlier they occur. High positive discount rates favor alternatives with costs that occur late.

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