BRIAN KANTOR: How SA’s high discount rate keeps a lid on growth
Managers and directors will look for quicker paybacks, for which fewer projects will qualify
In making economic or even social choices, how far ahead would you calculate future benefits? You may blow your Friday wage packet without any regard to how much food will be put on the family table the following week. Or you may run up the mortgage to fund an expensive holiday abroad. We might ascribe such myopia to high personal discount rates. Future benefits of saving clearly count for little compared with immediate pleasures. And an improved standard of living is made all the more difficult.
How far ahead should a business look? How many years of future cash flow should it take into account when evaluating an addition to plant and equipment? The longer the estimated payback period the greater the present value of the investment decision will tend to be. Waiting to get back risked capital in 10 or 20 years rather than five encourages investment. It means the application of a lower discount rate to future incomes or expected cash flows. It brings higher present values that ...