• Or : the outcomes-based discount rate, which is hyperbolic and considers pluralistic capital contributions. • C 0 : the initial investment, or cost at t 0 .
Forecasting benefits indefinitely can become impractical. While long-dated forecasts reduce the weight of terminal value, a mechanism is still needed to capture perpetual value creation.
One option would be to use a blended approach, that forecasts costs / benefits out to a pivotal date, (e.g., 2050) incorporating forecasted GDP under varying climate change scenarios (2°, 3°, etc.). Thereafter, g could take the form of projected GDP under a chosen scenario.
If we pursue this approach, with a constant g beyond the long-dated forecast, we may look to define ONPV including TV as follows:
Where: •
ONPV: Outcomes-based Net Present Value. • t : Time period, where t 0 is the initial investment. • n : the total number of periods. • Or : the outcomes-based discount rate. • C 0 : the initial investment, or cost at t 0 . • C F,t: The financial costs / benefits at time t . • C NF,t: The non-financial costs / benefits at time t . • TV F,t: The terminal value of financial costs / benefits at time t . • TV NF,t: The terminal value of non-financial costs / benefits at time t . • Or : the outcomes-based discount rate, which is hyperbolic and considers pluralistic capital contributions. • C 0 : the initial investment, or cost at t 0 .
TV is defined as:
Where: ● TV F = Terminal value of financial benefits. ● TV NF = Terminal value of non-financial benefits. ● C F, N = Financial benefits at n. ● C NF, N = Non-financial benefits at n. ● g = assumed growth rate. ● O r = outcomes-based discount rate.
However, if it is assumed that g cannot be constant due to the issues mentioned above, then the Gordon Growth model for terminal value is unsuitable. The ONPV model addresses this by incorporating a decay factor, allowing g to decline exponentially over time.
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