All entries for Friday 26 April 2013

April 26, 2013

KBAM: Discounting

An important element of life cycle costing is discounting. I have come across this concept before but now I understand it in a greater depth. In essence, it ensures that all costs or benefits are compared in a meaningful way. The idea stems from the fact that real value of money changes due to interest rates and inflation.

One quote that often gets mentioned whenever someone brings up the topic of net present value is: "A dollar today is worth more than a dollar tomorrow". This is true since you can invest that money and earn interest. Moreover, inflation will lead to an increase in the price of an item, meaning that you will not be able to buy it with the same amount in the future. I know that this detail can often get overlooked by people, so I will make sure that I avoid this mistake when evaluating alternatives or identifying preferred choices in the future.

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