Economic Evaluation – Discounting

[SOURCE: Glanz A and Knapp M (2017) Understanding substantive and theoretical issues in long-term care. Glossary of key terms. From: Social Protection Investment in Long-Term Care Project, HORIZON 2020 - Grant Agreement No 649565. European Union. (The resource is accessible here)]

In some cases, costs are incurred over more than one year or outcomes flow from an intervention over more than one year. In such cases, there will usually be a need to adjust future figures (i.e. costs or outcomes) so that they are comparable to present values. This is because most people attach lower value to future costs than they do to present costs. For example, €1,000 next year is worth less to me than €1,000 today, even after adjusting for price inflation. This is often called time preference.

An economic or other evaluation should therefore generally discount, or ‘downplay’, the value of future euros in order to compare them to today’s euros. The level of the discount rate used in an evaluation might follow what is recommended at national level for public investment appraisals.

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