Deferred discounts

Bills are due on monthly account with a 2 percent discount for cash. Overdraft and deferred-tax interest are compounded daily at nominal annual interest rates of 15 and 9 percent respectively. Corporation tax, capital gains tax, and personal income tax rates are 50, 40, and 30 percent respectively. The current rate of inflation is at 8 percent per year. The traditional return expected hy investors is 7 percent per year net of all taxes in real terms. 

The interest rate due on deferred tax is also net of corporation tax at 9.42 percent. The interest payable on overdrafts is an expense fully allowable against tax, so that the effective aftertax rate is reduced to (16.18)(1 — 0.50) = 8.09 percent. Similarly, as the advantage forgone on the discounts would tend to increase company profits and hence tax due, the effective aftertax gain is reduced to (24)(1 — 0.50) = 12.00 percent. 

Decommissioning costs may also be a factor to be considered in economic evaluation, but deferred cash flow discounting usually greatly reduces the significance. An exception may be plants which create lasting pollution, but such plants are increasingly unlikely to be licensed for operation in the first place. 

Discounting is a technique used to compare costs and benefits that occur in different time periods. It is a separate concept from inflation, and is based on the principle that, generally, people prefer to receive goods and services now rather than later. Society, as a whole, also prefers to receive goods and services sooner rather than later, and to defer costs to future generations. Thus both people and society value a benefit in the present more highly than the same benefit received some time in the future. Similarly, a health and safety measure paid for in the present is considered to be more costly than if it is paid for at some future date. 

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