DISCOUNTING MEANING OF DISCOUNT RATE

DISCOUNTING
Money has time value
money in different years should be recalculated to the same year to be comparable
Easy example: money (1000 EUR) now or next year, opportunity to invest for 10% (e.g. interest rate on bank savings account)
money now equals next year
money next year equals now

CLASSICAL INVESTMENT
Entrepreneurial investment
Investment first, then project generates “money” - i.e. positive cash flows
Discount has meaning of opportunity cost - i.e. return on other possible investment for given investor and given type of business (includes risk compensation)

DGR CASE
Reverse investment
Money savings first – e.g. fee imposed on power generation
Investment then follows
Discount rate has meaning of possible and “safe” appreciation of cummulated financial means on Nuclear account

APPREACIATION OF MEANS ON NUCLEAR ACCOUNT
Really existing money are cummulated on Nuclear Account
They invested into financial products – e.g. into governmental bonds, bank savings account etc.
Investment bring interest or coupon (form of interest) – in nominal value (like savings)

DISCOUNT AND INFLATION
Unfortunately we cannot exclude inflation from our calculations (when doing economic effectiveness calculation)
Business investment:
our operational expenses are subject to inflation
we pay income tax based on difference between revenues and cost
revenues growth with the inflation, operational cost too (possibly differently), but depreciation as part of total cost are fixed
if we neglect inflation, we overestimate role of depreciation as tax shield

DISCOUNT AND RAO MANAGEMENT
Example. We need to do something in year 2061.
Cost estimate in 2011 prices – e.g. 1000 EUR (if doing it now). How much it cost in 2061? How much money do I need now to have this amount in 2061?

DISCOUNT – REAL AND NOMINAL
Example as before. We try to avoid the inflation
No influence of inflation on our 1000 EUR investment (i.e. 2061 prices equal to 2011 prices)
But still we have to take into account appreciation of sources on nuclear account
We have to take out inflation from the interest rate obtained (in nominal value) – discounting with real discount