Discounting of investments reflects the sacrifice
The Solow–Swan growth function describing how capital and labour raise economic output has been a central doctrine in driving development in industrial societies. The main emphasis in governmental policy since the 2nd world war has been to achieve enhanced welfare through economic growth, based on raised production and consumption. Welfare is expressed annually as percentage of changes in GDP from the reference ZCL278 . In this context, efficient infrastructure and advanced skills (educated work force and technology) can partially substitute labour, and raise production efficiency. Engineers therefore often use CBA to assess capital investments.
A common practice in business and societal planning is to use CBA to weigh options before investments of various scales are made . Systematically, the project’s eventual impacts are catalogued as either costs or benefits. Side effects can also be listed, such as expected impacts on the environment or human health. Monetary amounts are then inserted for each of epoch and all the costs are weighed against all the benefits, usually set up in a timeline according to the expected incremental effects. The Net Present Value (NPV) is then calculated for both the costs and the benefits with discounting, using a predetermined discount rate . As long as the summed benefits weigh more than the costs in terms of NPV, beyond business as usual, the project enhances the totality of utility across individuals, which is a morally correct action and raises welfare in economic terms.