Determine the stream of benefits

In order to calculate the stream of benefits that would enable the Net Present Value (NPVBenefit - NPVcost) to be > 0 for the risk management scenario, the following assumptions are made:

  • The time horizon over which benefits occur is set at 20 years;
  • Benefits start in Year 2 (benefits are zero in year 1); and
  • The benefits are the same each year from Year 2 to 20.

Using these assumptions, the annual benefit for years 2-20 can be calculated using the following formula (where r is the discount rate):

AnnualBenefit = NPVcost
  [(1+r)2 + (1+r)3 + (1+r)4 + ... + (1+r)20 ]

Where:

  • AnnualBenefit is the benefit calculated for years 2-20 that satisfies the economic valuation test
  • NPVcost is the Net-Present-Value of the risk management scheme's costs
  • r is the discount rate

 

Source: Max Braun
Hatfield Consultants The World Bank funded by the Canadian POPs Trust Fund through the      
Canadian International Development Agency
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