- noun a method used by economists to calculate the cost in current value of a project’s future costs and benefits
- Adjusting cash flow to a common point in time (often the present) when an analysis is performed. The conversion of all costs and savings to time-equivalent "present values" allows them to be added and compared in a meaningful way.
(written as Discounting)A procedure for converting costs or benefits occurring at different dates to a common measure by use of an appropriate discount rate. Thus, with an annual discount rate r (expressed as a decimal fraction) the present value (PV) of a cost (C) in one year's time is PV = C/(l + r). In two years' time, it is PV = C/(1 = r)2. The PV of a stream of future costs is the sum of every year's PV. For a stream, C, that is constant, the discrete time formula is PV = C(1 - (1 + r)-n)P/r. Of course, the same procedure applies to benefits as to costs. In cost-effectiveness and related analyses there is controversy as to whether a common discount rate should be used for costs and benefits and also as regards the use of the general rate used for public sector decisions.