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Discounting models for long‐term decision making

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  • C. Robert Kenley
  • Donald C. Armstead

Abstract

This paper investigates alternative approaches to constant rate discounting for calculation of Net Present Value (NPV) in life cycle cost models that are used for engineering trade studies. Alternative approaches are necessary to meet the challenge of equitable intergenerational resource allocation for projects like radioactive waste disposal that have a life cycle that impacts future generations well beyond the 30‐year maximum time horizon limit that results from using market‐determined interest rates on bonds. This paper reviews the literature on long‐term discount models, provides a consistent nomenclature for describing the models, summarizes the theoretical and empirical basis for hyperbolic discounting models, evaluates the research results to date, and provides a recommendation for applying hyperbolic discounting. It also identifies issues with the current U.S. government policy on discounting and the future research necessary to establish an improved foundation for discounting models for long‐term projects. © 2003 Wiley Periodicals, Inc. Syst Eng 7: 13–24, 2004

Suggested Citation

  • C. Robert Kenley & Donald C. Armstead, 2004. "Discounting models for long‐term decision making," Systems Engineering, John Wiley & Sons, vol. 7(1), pages 13-24.
    • Handle: RePEc:wly:syseng:v:7:y:2004:i:1:p:13-24
    DOI: 10.1002/sys.10051
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