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Allowing for differential timing in cost analyses: discounting and annualization
Damian Walker1, Lilani Kumaranayake
1Health Policy Unit, London School of Hygiene and Tropical Medicine, London, UK. damian.walker@lshtm.ac.uk
Health Policy and Planning
|February 28, 2002
Summary
Economists use discounting and annualization to compare costs over time. Discounting accounts for time preference, while annualization helps understand recurrent and capital costs for economic evaluations.
Area of Science:
- Health Economics
- Economic Evaluation
- Cost Analysis
Background:
- Costs incurred at different times require adjustments for accurate financial and economic comparisons.
- Time preference influences the perceived value of future costs, necessitating specific economic methodologies.
Purpose of the Study:
- To examine issues in comparing cost data over time.
- To focus on discounting and annualization adjustments used in economic cost calculations.
- To provide guidance on when to apply these adjustments.
Main Methods:
- Explains the economic concept of discounting to address time preference.
- Introduces annualization to calculate annual equivalent costs for recurrent and capital expenditures.
- Discusses practical rules-of-thumb for applying these adjustments.
Main Results:
- Discounting adjusts future costs to present values based on time preference.
- Annualization provides a consistent yearly cost, reflecting capital item usage over an intervention's life.
- Methods for both discounting and annualization are presented.
Conclusions:
- Discounting and annualization are crucial for accurate economic evaluations over time.
- Annualization offers insights into capital asset utilization alongside recurrent costs.
- The paper equips researchers with methods and decision criteria for cost adjustments.